Income Tax 21 Jan,2020
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Budget Demands for Automobile Sector – A Saviour for the sinking ship!
Abhishek GoelChartered Accountant

 

The current period probably remained one of the most challenging years in the history of the automotive industry in India. Vehicle sales started to witness de-growth onwards of the second-half of the year and the trend continued unabated much into the first half of 2019-20. The situation was made even more difficult as the industry grappled with transitioning from BSIV to BSVI as also becoming complainant with several of safety, emission and environmental norms. Added to this has been the uncertain timelines for migrating to electric mobility, especially for two and three wheelers.

Although a lot of reforms were planned during the Final Budget 2019 however, a lot of structural changes are still required considering the present state of the sector.

Some of the major asks of the Automobile sector are as follows:

A. Customs & FTP

1. Fund for technology upgradation and incentivizing R&D (research and development)

Several emerging economies have constituted automotive-specific incentives for research & development. Table 1 summarises their comparison vs. Indian initiatives. This shows there are opportunities for the government to further enable the automotive-focused research and development in India.

Table 1 R&D incentives across countries

R&D incentives India China Brazil Malaysia Indonesia
Reduced tax rates Incentives/ tax deductions1
Accelerated depreciation/ amortization Very limited
Patents/IP/Trademarks related Very limited Very limited Very limited Very limited
Cash grants Very limited Very limited Very limited
Expedited government approval process Very limited Very limited Very limited Very limited Very limited
Financial support and loans Very limited Very limited Very limited

Of the above mentioned initiatives, the 'Financial support and loans' for automotive components industry has been a critical aide in the growth of automotive components sector in Malaysia and China. Financial support for new technology developments helps in off-setting the inherent risk associated with venturing into a seemingly uncertain market(s).

In order to help the industry participants contribute to the ambitious targets of Automotive Mission Plan (AMP) 2026, the government of India may consider setting up specific technology upgradation funds targeting upcoming technological changes (like electrification of powertrains). These funds can be in form of soft loans, tax incentives etc.

2. Increase in Custom Duty on all auto products falling in 7.5%/ 10% to 15%:

The custom duty on auto-components falling under remaining chapters namely, Chapter 68, Chapter 70, Chapter 83, Chapter 90, Chapter 91 and certain tariff items falling under Chapter 40, Chapter 84, Chapter 85 and Chapter 87 shall be increased from current rate of 7.5%/10% to 15%. This will not only boost domestic demands in the auto industry but also helps the government in reducing the current account deficit. Moreover, this will help us attracting foreign investment in core automotive industry.

3. Reduction in custom duty rates on Alloy Steel, Aluminum Alloy, Secondary Aluminum Alloy, Aluminum Scrap and Copper Wire

The cost of raw material constitutes approximately 60% of the cost of an auto component which largely includes the cost of alloy steel and metals. Therefore, any fluctuation in raw material price has a major impact on this industry.

4. Duty Drawback should be changed back to FOB value basis from weight basis

The basis for computation for Duty draw back rate on most of the items has been amended vide Notification No.110/2015-Customs (N.T.) dated 16 November 2015, 88/2017- Customs (N.T.) dated 21 September 2017 and Circular No. 13/2014 - Customs dated 18 November 2014. As per the said notifications and circulars duty drawback is calculated basis the weight of the products instead of FOB value of the same.

This aspect needs to be reconsidered for high technology items, since the focus is on manufacturing light weight and fuel efficient products. For instance, for engineering and specialised products, the weight can't be right denominator to claim Duty Drawback. Therefore, companies not able to take corresponding drawback benefits as the product weight is low.

Further, GOI have raised Customs duty for many of the products, but have not raised corresponding all Industry duty drawback rates, this with accumulation of cases due GST re-organisation, have caused enormous amount of pain on the exporter in working capital management and put the business in stress. It is required to re-evaluate all Industry rates with an upward revision as with the increase in customs duty rates leading to higher costs, increase in All Industry duty drawback rates will help to partially offset the cost impact for exporters.

B. Goods & Services Tax

1. Rationalisation of GST Rates

  •  The rate of GST applicable on automotive components in India is higher to the tune of up to 2x - 3x the GST rates in the below economies:

Countries India Malaysia Indonesia Japan Singapore Canada
Rate of GST applicable for automotive components 18% - 28% 6% 10% 8% 7% 5-15%
Incl. Provincial taxes

  •  Currently, the consumer is paying 18% GST for repair services and up to 28% for replacement parts and consumables. The difference in rates between services and parts has put pressure on the unorganized service sector in tracking and compliance aspects.

  •  A reduction in tax rate would incentivize the unorganized sector to undertake GST compliance and it will also reduce the gap in the price between the standard vis-à-vis the sub-standards.

  •  Normalization of GST rate can potentially act as an incentive for vehicle owners - especially for the commercial vehicle owners & operators to avoid missing the OEM-prescribed maintenance schedules of their vehicles. Higher frequency and timely maintenance of the commercial vehicles will help improve their average running condition - thereby having a positive impact on average pollution and vehicular safety on Indian roads.

2. Relaxation in provisions in relation to Input tax credit (ITC) restrictions contained in Section 17(5) of CGST Act, 2017

Section 17(5) of the CGST Act 2017 prescribes certain inward supply of goods and services in respect of which input tax credit is not available to the assessee. In view of the same, the automobile industry is looking out for notification from the government on various supplies in respect of which input tax credit should be allowed to the recipient:

S.No. Nature of inward supply Justification Key Demand

1.

Input credit on GST paid on Canteen and other employee related services

Section 17(5)(b)(i) of CGST Act, 2017 provides that credit shall not be available for food and beverages, outdoor catering, renting or hiring of motor vehicle except when inward supply is used for making an outward taxable supply of the same category or as an element of taxable composite or mixed supply.

The transportation and canteen services provided to the employees are for the welfare of the employees and hence, are required for the furtherance of business.

Necessary amendments be made to allow GST credit of the transportation and canteen services provided to the employees in the course of business.

2.

Input credit in respect of works contract services

The Construction/ extension of factory building involves huge capital investments and disallowance of credit on Works Contract service is leading to cascading of taxes and becomes cost to the Company.

Section 17(5)(d) of CGST Act, 2017 reads that goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business

The GST paid on investments undertaken is not eligible for input credit in present GST Law. Ultimately, the GST paid amount becomes cost to the Company leading to cascading of tax which is not the spirit of GST Law as to provide seamless credit.

The restriction of ITC in respect of all works contracts resulting in Immovable property at large should be removed as in large number of contracts qualifying as Works Contracts, the end result would be immovable property.

3.

Non-reversal of credit in case of goods lost, destroyed or stolen

Section 17(5)(h) of CGST Act, 2017 provides that credit shall not be available in case the goods are lost, stolen, destroyed, or written off or disposed of by way of gift or free samples.

It is pertinent to note that while storing of goods before their supply, losses are bound to happen due to natural reasons such as evaporation. Further, free samples are required to be given to customers for getting orders and are used for furtherance of business. In such cases the law provides that ITC availed on such goods is required to be reversed.

The provisions should be amended to exclude:

  a. loss of goods because of natural reasons within a permissible limit expressed based on nature of goods.

  b. goods sold as free samples.

C. Direct Tax

1. Extending tax rate benefits to existing manufacturers and to Individuals/ partnerships

The automotive component industry is facing tough time due to recessionary slowdown in the sector. The Taxation Laws (Amendment) Act, 2019 has reduced the effective tax rate on companies to 25.17% (22% tax + 10% surcharge + 4% cess). Further, for companies newly set-up and engaged in manufacture, corporate tax rate has been reduced to 17.16% (15% tax + 10% surcharge + 4% cess).

Although the tax rates have been slashed substantially however, it has resulted only marginal relief for small manufacturers (having turnover of upto Rs. 400 crores in the previous year 2017-18) as their tax rates reduced from 26% (25% + 4% Cess) to 25.17%. Further, the preferential tax rates are only available for the corporate assessees and not to Partnerships/ LLP which constitute major strata in the industry.

Thus, the beneficial tax rates should also be extended to partnerships/ LLP in order to promote MSME's in the automobile industry.

2. Rationalising the margins under Safe Harbour rules for EV auto component manufacturers in India

The safe harbour rules provides standard rates of operating profit margin for manufacturing and export of auto components.

In March 2019, Government of India has introduced FAME-II policy to promote Electric Vehicles in India. Huge subsides given under FAME-II policy that will certainly encourage EV sales in India and also attract investments in India from global/domestic players. On the other hand to support Electric vehicle supply chain, Government has not incentivized EV Auto Components Manufacturing in India.

Foreign Investment in India in this area can play a bigger role in order to support supply chain and thus, the safe harbour rules to be widened to include the EV and EV component industry as well. Further, the rates specified under the rules should be rationalised.

3. Additional incentive under Direct tax to expand scope of FAME-2 Policy

The government has recently issued a scheme for Faster Adoption and Manufacturing of Electric Vehicles in India Phase II (FAME India Phase II) policy. The policy inter alia includes demand incentives to be given for generation of demand of electric vehicles ("EV") in India. However, there is no direct incentive given by the government for promotion of manufacture of EV components.

The Finance Minister in her budget speech 2019 has announced that tax incentives will be given for investment in sunrise and advanced technologies. Thus, the Auto industry is eagerly waiting for the government to announce tax holiday for companies engaged in production and development of components for EV basis the technology transfer/ development.

Thus, although a lot is expected by the Automobile sector from the Union Budget 2020, one can only wait for February 01, 2020 to see what the government has offered to the indigent sector.

 

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  1. This category includes all the incentives related to tax, such as tax allowance, income tax rebates etc.