Opinion: Budget a Mixed Bag for Auto Sector

(Sarika Goel is a senior tax professional at EY India)

Prime Minister Narendra Modi's first full-year Budget was perhaps one of the most talked about Budget with huge industry expectations in light of the 'Make in India' program.

Some of the key Budget highlights from an automotive sector perspective are outlined below.

The proposal to reduce corporate tax rate from 30 per cent to 25 per cent in a phased manner over the next four years coupled with pruning of existing exemptions/incentives under the current law is welcome.

Reiteration of the government's commitment towards implementation of the Goods and Services Tax regime from April 1, 2016 is also a positive move, especially for the Indian auto sector, which is currently dealing with high rates of indirect taxes and a fragmented domestic market due to tax inefficiencies of interstate trade.

The restoration of withholding tax rate on royalty and fees for technical services from 25 per cent to 10 per cent on non-resident payments, which would facilitate technology inflow, would also bring cheer for domestic manufacturers.

With a view to promote industrial development in notified backward areas of Telangana and Andhra Pradesh, the Finance Minister has offered additional investment allowance of 15 per cent of cost of new assets as well as additional depreciation at 35 per cent instead of 20 per cent for manufacturing units set up in the said areas.

Under existing provisions, additional depreciation on new plant and machinery was restricted to 50 per cent in the year of acquisition, if this newly-acquired asset is put to use for a period less than 180 days in the financial year. Post the amendment, the balance 50 per cent of the additional depreciation shall be allowed in the immediately succeeding year.

Benefit of deduction of additional workmen wages has been extended to non-corporate manufacturing units and the threshold reduced from 100 regular workmen to 50.

The basic customs duty rates for passenger cars remain unchanged, while commercial vehicles will attract a basic customs duty of 10 per cent when imported in a completely knocked down (CKD) form and 20 per cent otherwise. Import duty on auto parts would generally increase from 28.85 per cent to 29.44 per cent due to the change in general excise duty rate.

With education cess and secondary and higher education cess being completely exempted on all goods, the effective excise duty on large cars would marginally reduce, while excise duty on small cars would slightly increase due to a change in basic excise duty from 12 per cent to 12.5 per cent.

In the wake of promise of a more stable and non-adversarial tax administration, the Budget proposals include rationalisation of penalties and extension of advance ruling mechanism to resident partnership firms (including LLPs), sole proprietors and one-person companies under customs, excise and service tax laws.

The Finance Minister has also proposed to abolish the Wealth tax Act and increase threshold for domestic transfer pricing to Rs 20 crore, which would help reduce compliance burden. From an investor perspective, deferment of GAAR (General Anti-Avoidance Rules) and clarity on indirect transfer tax are positive moves.

On the flip side, the industry is a tad disappointed that their key expectations of re-implementation of excise duty concessions; exemption from Special Additional Customs Duty (SACD) to minimise CenVAT credit accumulation, especially for exporters, and tax sops for R&D were not met.

The increase in service tax rate from 12.36 per cent to 14 per cent (and the proposed levy of Swachh Bharat cess of 2 per cent on services in future) would lead to a higher cost of doing business, in the absence of a service tax set-off mechanism for re-sellers.

On balance, the Budget looks to establish a modern tax system which would provide impetus to growth, investments and creation of jobs. The industry only wished that the Finance Minister would have included a few more robust measures focused on revival of the automotive sector.

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