At the same time, the finance minister is faced with a growing fiscal deficit and needs to garner revenues. Moreover, steps towards reducing the fiscal deficit could lead the finance minister to take revenue-generating measures. The industry hopes that that there are no kneejerk reactions and the Budget contains measures to promote long-term growth.
Given this backdrop, the industry expects some sops in this Budget to overcome few of these economic challenges.
A clear roadmap for GST implementation
The industry players are subject to multiple taxes, that is customs, excise, service tax, etc. A simplified tax structure as envisaged under the GST regime will be more effective. While the implementation of the GST regime has been deferred often in the past, the industry expects a clear roadmap in the forthcoming Budget.
Certainty in this uncertain environment - implementation of Advance Pricing Arrangement (APAs)
The adjustments on transfer pricing are enormous and the auto industry has not remained insulated from this. These adjustments create uncertainty in the tax environment. The industry expects APAs to be introduced in this Budget in order to bring tax certainty and thus, some respite to the auto industry in these challenging times.
Stability and rationalisation in excise duty
The industry expressed apprehension about the government increasing excise duty by 2 per cent in this Budget, in order to align the rate structure to the overall GST framework. The current excise duty structure is as follows:
Type of Car
Current excise duty
Small cars (motor vehicles of length not exceeding 4 metres)
Less than or equal to 1200 cc per unit for petrol variants
Less than or equal to 1500 cc per unit for diesel variants
More than 1200 cc per unit for petrol variants
22% + Rs. 15,000
More than 1500 cc per unit for diesel variants
22% + Rs. 15,000
The industry expects the finance minister to keep the excise duty rate constant at the current level of 10%, if not reduce it. It also expects some rationalisation in the excise duty for big cars. It is expected that the excise duty for big cars should be brought at par with small cars i.e. reduction of excise duty from 22 per cent to 10 per cent.
Incentives for R&D
The industry is R&D-intensive, evident from ongoing innovation in the fields of technology and design of vehicles. The government needs to create an incentive platform to promote the R&D activity in this sector. The current provisions of accelerated deduction of 200% of R&D expenditure is about to expire in March 2012. The industry expects this incentive to be extended further so as to give an impetus to R&D activity. If continued, this incentive will also seek to achieve the go green objective by encouraging companies to emphasise on R&D for the development of eco-friendly vehicles.
Higher rate of depreciation on plant and machinery
The auto industry is highly capital-intensive as well as susceptible to technology changes. Given this, accelerated depreciation is an important avenue to facilitate fund generation for replacement as well as expansion. Currently, the depreciation is allowed at the rate of 15 per cent on plant and machinery. The FM needs to increase the rate of depreciation from 15 per cent to 25 per cent in order to enable fund generation to fuel growth in this industry.
No diesel tax
The Kirit Parikh Committee has recommended a special excise duty of Rs 80,000 as diesel tax to be levied on diesel vehicles in order to discourage further diversion of diesel consumption in the personal auto segment. This recommendation, if implemented, will have a negative impact on the passenger vehicle segment. Further, this move is unwarranted given the fact that diesel consumption in the passenger vehicle segment is barely 2 per cent of the total diesel consumption. The industry expects that this additional levy should not be introduced.
Promotion of eco-friendly vehicles
As part of India's commitment towards a greener world, the government needs to bring in provisions in the forthcoming Budget to promote the manufacture and usage of eco-friendly vehicles. The industry expects the Budget to bring in tax incentives in the form of an investment rebate or a tax holiday for new investments in plants to manufacture eco-friendly vehicles. Further, there needs to be provision to encourage customers to buy eco-friendly vehicles. For example, a tax rebate on the purchase of electric hybrid vehicles
Incentives to boost infrastructure
Infrastructure development has a direct bearing on the growth of the auto industry. Budget allocation especially for rural infrastructure development will give a boost to the auto industry particularly the two-wheeler segment. Better infrastructure will result in increased demand for such vehicles.
Increased liquidity by reduction in tax rates
The industry expects the finance minister to leave more money in the hands of corporates by reducing the tax rate. Globally, the average corporate tax rate hovers around 25 per cent. The corporate tax rate should be reduced to 25 per cent in a gradual manner. The industry thus expects some reduction in the corporate tax rate and a complete removal of surcharge and the education cess.
Further, the disposable income in the hands of consumers should be increased so as to sustain the demand in the auto sector. It is expected that the Budget will increase the exemption limit to leave more disposable income in the hands of consumers.
While the industry is facing a tough time currently, the finance minister can play the role of a catalyst by giving the much needed sops in the upcoming Budget to sustain the growth of the auto sector.
Dinesh Supekar is Partner, Tax & Regulatory Services, Price Waterhouse & Co; Navneet Kothari is a senior manager, Tax & Regulatory Services, Price Waterhouse & Co.