New Delhi: India is the world’s third-largest automobile market, and the sector has witnessed significant positive changes over the years. However, there are still certain challenges that require the attention of policymakers, and it is crucial that focused efforts are made to address these issues.
As the country prepares for Finance Minister Nirmala Sitharaman’s Budget speech on February 1, automotive industry experts are closely watching for potential relief measures for this sector that contributes more than 7% to India’s overall GDP.
Alternative Fuels
The ever-evolving auto sector is undergoing a significant transformation towards clean fuel technologies. While electric vehicles (EVs) attract a GST rate of 5%, industry is also looking at incentives for alternate fuel technologies like hybrids, hydrogen and flex-fuels.
Vikram Gulati, Country Head and Executive Vice President – Corporate Affairs and Governance, Toyota Kirloskar Motor has requested the government for “appropriate merit-based policies that support and help in popularising a full range of greener technologies and alternative fuels”.
Considering the substantial investment and lengthy product development cycles, Piyush Arora, MD & CEO of Skoda Auto Volkswagen India, has also urged for a long-term vision towards favorable tax structure catering to different automotive technologies.
Rajeev Singh, Partner and Consumer Industry leader at Deloitte said, incentives for hybrid technologies will encourage automakers to opt for an effective bridge to EVs, especially in regions where the EV charging infrastructure is still underdeveloped. Hybrid vehicles in India are currently levied a rate of tax of 28%, equivalent to ICE vehicles.
While carmakers like Tata Motors and Mahindra & Mahindra are adopting an EV-only approach, others like Maruti Suzuki, Toyota Kirloskar are taking the hybrid-route. Meanwhile, Kia is evaluating hybrids for the India market, and JSW MG is planning a flex-fuel vehicle, along with selling EVs. Hyundai recently stated it is also considering options to include hybrid, hydrogen, or flex-fuel systems.
For the commercial vehicle segment, OEMs are placing their bets on hydrogen and LNG fuels.
Additionally, Vaibhav Pratap Singh, Executive Director, Climate and Sustainability Initiative (CSI) said given their long payback periods, extending incentives and establishing dedicated financing options for EVs is also crucial to sustain momentum and meet electrification goals, particularly for larger vehicles like buses and trucks.
Scope of existing schemes
The Production Linked Incentive (PLI) scheme for automobiles is playing a significant role in attracting investments and boosting domestic manufacturing of automobiles and auto components. However, to enhance the success of the scheme, the government could consider relaxing the domestic value addition (DVA) criteria and streamlining the disbursement process. This would ensure that incentives are provided to eligible applicants in a timely manner.
Singh of Deloitte stated that streamlining the process will warrant improved cash flows for manufacturers, enabling them to invest in production scale-ups, ensure faster decision-making and investments in the sector.
Next, in the “Scheme to Promote Manufacturing of Electric Passenger Cars in India” the government has limited the applicability only to vehicles of value USD 35,000 and above, which is rendering it ineffective for a majority of the OEMs in a price sensitive country like India.
Experts suggest the government could consider extending the benefit of reduced customs duty to four-wheelers valued up to USD 35,000 to attract greater investments.
“Reducing trade barriers and simplifying regulatory frameworks can further integrate India into the global supply chain, while any additional measures that lower the cost of doing business can result in attracting new investments,” Santosh Iyer, Managing Director & CEO, Mercedes-Benz India said.
Simplifying GST Structure
According to Arora, the government should look at the complexity and inconsistency in the classification of auto parts, components and finished vehicles under the HSN (Harmonised System of Nomenclature). He suggested simplifying the GST structure for the different classes of vehicles & components.
Singh of Deloitte suggests a structure where similar components or components with similar end use are categorised under the same bucket as different auto components, such as engines, chassis, and batteries, fall under different chapters which results in increased complexities and incorrect classification, especially by companies dealing with auto components.
Another concern by OEMs in the EV space has been the inverted duty structure, wherein EVs attract a lower GST rate than major inputs, including lithium-ion batteries.
“This leads to OEMs not being able to adjust the input tax paid against the tax receipts, thereby locking up precious working capital. Therefore, the sector has long demanded harmonising GST at 5% across the value chain,” Venkatesh Raman Prasad, Partner, JSA Advocates & Solicitors
Additionally, industry is looking forward to a continued thrust on infrastructure spending, safe road infrastructure, rural output and job creation. A budgetary initiative to boost disposable income of consumers will also help support robust growth.
Shamsher Dewan, Senior Vice President and Group Head, Corporate Ratings, ICRA Limited said, “Proposals around skill development, rationalisation of tax rates and policy measures promoting the ecosystem of alternative fuels, vehicle scrappage, and parts localisation shall aid the broader automotive sector”.
