Budget 2022: Auto industry expects rationalisation of rates, long-term vision for EV sector

The auto sector in India being one of the top contributors of GDP, is once again pinning hopes on the upcoming Union Budget 2022 for some strong and fruitful reforms.

Following, COVID-19 pandemic the auto sector has been grappling with rising material prices, shortage of semi-conductors, low sales volumes and thus now needs reforms for a vigorous recovery ahead. In the recent past, the government has been focussing on key reforms across all sectors including the auto sector, the recent example of which is the production incentive scheme (PLI) for auto & advanced chemistry cells (”ACC”).

The PLI scheme has provided an opportunity to make Bharat self-reliant by way of manufacturing products of advanced automotive technology (AAT) within the country and also help in making the country an export hub for the world market . One of the most important aspect laid down in the PLI was focus on localisation (i.e. achieving minimum 50 percent of the value addition domestically for AAT products and minimum 60 percent of the value addition domestically for ACC), which is likely to help in accelerating the growth in the sector.

Considering, the government has laid stress on localisation, it is expected that there will be a plan of phased increase in the custom duty rates on AAT products and ACC. Further, the industry can also watch out for phased increase in other components which are used to manufacture such AAT products and ACC. This change would be a gradual process and likely to commence with the upcoming budget. Thus, it appears that the auto industry needs to be prepared for an overall price increase of various imported components until the goal of localisation for those is achieved in India.

Moving on to another important reform which the auto industry is eyeing with all eagerness is rationalisation of GST rates for all auto components to 18 percent. The auto industry has a wide range of components which are presently subject to GST rate of 18 percent or 28 percent basis the HSN classification. The same has led to litigation across various forums regarding classification of these components within industry; and even the tax authorities had to issue a clarification providing guiding principles of classification recently.

Thus, the industry’s ask of rationalising the rates at 18 percent if accepted, will surely provide a breather to this long pending issue and will set a positive tone within the industry. Currently in this pandemic era, the chances of government accepting such proposition appears to be less as it needs revenue to fight the problems caused by the pandemic. However, even if an announcement is made in this budget to express intent to resolve this conflict in classification, there may be a positive impact on industry.

Another important reform that the auto industry is surely looking forward to, is increase in the RoDTEP rates basis which refund is granted against exports from India. It is a new scheme which was launched last year replacing the MEIS and provides refund of non-creditable taxes in the supply chain basis specified percentage of the FOB value of exports. The industry is of the view that the current RoDTEP rates notified for the auto sector are not enough to cover the non-creditable taxes which are getting built as a cost in the product being exported outside the country. Additionally, there is an ask to expand benefit of RoDTEP scheme for deemed exports and goods supplied from DTA to SEZ/FTWZ. The chances of industry getting increased rates appears to be low in the upcoming budget.

In the year 2022, it is expected that the auto industry will see an accelerated transition to EV sector which is expected to increase year on year, as India moves towards achieving its target of net zero carbon emission and greener fuels. Considering, the government has also shifted focus on EV sector, Budget 2022 provides an opportunity to bring out changing reforms to boost to EV sector. Currently, an EV is not a first choice for any consumer primarily because of the higher costs associated with it and lack of infrastructural arrangements.

There is a dire need to come out with affordable EV and improve the infrastructure to gain the customer confidence. It requires measures around correcting the inverted GST structure by way of subjecting all EV components (including batteries) at a flat GST rate of 5 percent, rolling out more incentives and policies to aid reduction in manufacturing costs ultimately leading to lower price of vehicles for the end consumer which would help in early adoption of EVs in the country. Since EV is an upcoming sector within the auto industry introducing policy/reforms around the same would surely lead to laying a roadmap for future and set a long-term vision in the EV sector.

On the corporate tax front, need of the industry is not very different as they seek no increase around the corporate tax rate. As EV industry is very new along with other greener fuel ranges, it is important to consider providing incentives around R&D specially focussing on such fuel range. This may include not only providing support through tax reforms, but some non-tax mechanism can also be explored for providing support around R&D. This will additionally serve the purpose of achieving considerable localisation percentage for auto components in the long term.

In nutshell, unlike Budget 2021, this time the government may use the opportunity to outline reforms focussing on the long-term strategy for the automobile sector which surely can lead to significant increase in the demand of vehicles in all segments. This would enable the auto sector in contributing to the economy especially during these turbulent times of pandemic.