If an incentive-based scrappage policy is adopted in the Budget 2021, it shall boost demand for new vehicles while helping the government achieve its targets for reducing carbon emissions
Last year was the one we will be talking about for decades to come. For the auto sector, the story of 2020 is about grit and determination shown by the industry to overturn the downturn (sales fell around 80% in Q1) it faced in sales since COVID-19 hit the world.
Sales numbers started improving in the latter half of the year, holding promises for a better 2021 for the auto industry.
With growing preference for personal mobility, quick adoption of digital practices by industry to serve consumers, improved spending during the festive season, and strong rural demand, the automobile sector in India has started to see signs of recovery in some segments and is cautiously looking forward to the next year for overall recovery.
Having said that, the industry is certainly going to need economic stimulus and relief from the Union Budget 2021-22 and there is a great deal of expectation around it from every stakeholder in the sector.
Such reliefs encompassing multiple areas like direct and indirect taxation, separate budget allocations, policy announcements, etc. are expected to boost India's automobile growth story and provide the required breather for the industry to cope up.
The government also announced in November 2020 to include the automobile sector in the Performance Linked Incentive (PLI) scheme with a capital outlay of Rs. 57,042 crore. While the details of the PLI scheme are still being finalised by the Ministry of Heavy Industries, some of the long-standing demands of the sector to boost demand and increase vehicle penetration are still pending.
Reduction of GST rates on vehicles from the current 28% to a moderate 18% and measures to improve the disposable incomes, shall help towards increasing demand for automobiles.
In view of the limited fiscal room available with the government, this may look challenging, but any measures towards such rationalisation by the GST Council of India could broaden the GST base for compliance and taken as a cheer by the industry.
Further, an increase in demand may partially offset the fall in tax collections for the government.
The Road Transport and Highways Ministry has prepared a detailed proposal to introduce a scrappage policy to phase out older and more polluting vehicles, older than 15 years.
As called out by the Society of Indian Automobile Manufacturers (SIAM), if an incentive-based scrappage policy is adopted in the upcoming budget, it shall boost demand for new vehicles while helping the government achieve its targets for reducing carbon emissions.
Since the lockdown, RBI has reduced repo rates by 115 basis points, driving down interest rates on loans. Lower interest rates give the government an opportunity to expand the availability of tax deductions on interest for loans on EVs.
Currently under section 80EEB, a tax deduction of up to Rs. 1.5 lakhs can be claimed on interest for loan taken to buy an electric vehicle. With the government looking to push green initiatives such as EVs, adoption of lower emission norms, etc., there is a need for it to focus on rationalising the import duties on certain products/components and also waive the customs duty of 5% from the manufacturing of battery cells in India.
The industry will be looking forward to measures to promote investment in EVs, including associated ancillaries.
Any policy around promoting R&D in the automobile industry, under the "Atmanirbhar Bharat" could boost foreign investments in India for the development of new and clean technologies.
In addition, the reintroduction of a 15 per cent additional deduction for capital expenditure on plant & machinery under the Income Tax laws, for a minimum period of 2-3 years, would provide a clear roadmap to investors in planning for investments in the automobile sector and further boost the country's domestic manufacturing objective.
(Rajeev Singh is Partner and Automotive Leader, Deloitte India; Anish Mandal is Director, Deloitte India.)