The year 2019 was an extremely challenging year for the Indian automobile industry. The headwinds caused by the upcoming transition to BS-VI emission norms from April 2020, NBFC crisis, growth of the economy being at an 11-year low and higher fuel prices contributed to the turbulence. As the new year brings new beginnings, the automobile industry hopes the government would provide the additional impetus to bring the industry back on a growth trajectory.

A key ask from the industry to ensure a reduction in prices and increase in demand is that the GST rate should be either reduced from the current 28 percent to 18 percent or cess should be waived/ reduced till the time markets show recovery. Driving out the passenger motor vehicles and allied services from restricted input tax credit list, similar to motor vehicles with capacity beyond thirteen passengers, would also reduce the overall cost impact for buyers. It is hoped that the government and the GST Council also consider that the loss of revenue on account of these concessions could be neutralised to some extent by the improved tax buoyancy due to higher sales.

Despite the reduction in crude prices in international markets in the past few years, the corresponding benefit is not passed on to the end consumers. Instead, the government has been increasing excise duty rates on fuel prices. Considering the increase in the inflation rate, it is expected that the government should either bring petroleum products under GST or reduce the excise duty rates.

As announced in the Budget Speech of 2019, a separate scheme for setting up of mega manufacturing plants in sunrise and advanced technology areas including lithium storage batteries and solar electric charging infrastructure with direct tax and indirect tax incentives would also promote the development of electric vehicles (EV) ecosystem. It is also hoped that these tax benefits are allowed simultaneously with lower corporate tax rates. Further, given the current lack of local manufacturing capabilities, it is expected that custom duty for EV battery imports are reduced in the short term.

Incentive-based Scrappage Policy

From income-tax perspective, the recent reduction in corporate tax rates has been a game-changing move and should attract new investments in the medium to long term. We have seen that the income-tax incentive under section 80JJAA is not achieving its desired purpose of incentivising new job creation due to very low threshold of Rs 25,000 per month of salary for eligible employees. There is a need to at least double such threshold to Rs 50,000 per month so that the job creators are fairly incentivised.

There are a large number of direct tax appeals pending across various appellate authorities. Similar to ‘Sabka Vishwas’ scheme under GST, there is a need to introduce a one-time dispute resolution scheme under the Income Tax Act. This may also accelerate the revenue collection for the government with reduced litigation cost.

The industry expects a formal incentive-based ‘Scrappage Policy’ for passenger cars with support from the government in the nature of partial rebate in GST, road taxes and waiver of registration charges on purchase of new vehicles as replacement of very old vehicles. This will not only help in boosting the demand but also retire older vehicles which are a major cause of pollution. It is important to ensure that the quantum of benefits are sufficiently attractive to ensure the success of the policy.

As per CRISIL’s recent report, there has been a slowdown in awarding highway construction projects in 2019 on account of financial constraints and delay in land acquisitions. Measures to incentivise private sector developers to take up highway projects and encouraging financial institutions to increase lending to the sector are the need of the hour.

While the fiscal deficit situation is grim, it is hoped that the finance minister introduces measures to boost consumption and growth in the automobile industry. From the connected car to the autonomous car, the automobile industry has been constantly innovating and has been the growth engine for the manufacturing sector. Getting the automobile industry back on the growth highway will have a ripple effect on jobs, other allied sectors and eliminate speed breakers on India’s goal to quickly reach $5 trillion economy.

Pramod Achuthan is Tax Partner at EY India. Prasad Kulkarni, Senior Tax Professional with EY, has also contributed to the article. The views expressed are personal.