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Union Budget 2018: Not Much For Auto Sector

The Union Budget 2018 did not give much for the automobile sector, which is one of the most significant contributor to country’s manufacturing and GDP growth

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The Union Budget 2018, which was announced by Indian finance minister Arun Jaitley on 1 February, focussed on rural economy and infrastructure sector that are indispensable for sustainability of economic growth. 

The Budget 2018, however, did not give much for the automobile sector, which is one of the most significant contributor to country’s manufacturing and GDP growth.

Gaurav Karnik, Tax Partner Automotive sector, EY India says, “From an automotive sector perspective, much was expected from the Budget. However, the Budget provided only a few positives on the direct tax side such as reduction in corporate tax rate to 25 per cent for companies having turnover up to Rs 250 crore, rationalisation of the tax incentive for hiring new workers.” 

“On the indirect tax side, with a view to promoting the Make in India program the customs duty rates have been increased on automobile parts, CBU and SKDs.  However, there has been no extension of direct tax benefits for R&D which was much needed keeping in perspective the upgradation to BS VI emission standards,” added Karnik.

Increasing the current basic customs duty for engines of 7.5 per cent to 15 per cent will result in rise of manufacturing cost of automobiles with imported engines.

The Union Budget 2018’s focus on agriculture and infrastructure sectors will indirectly give a fillip to the sector. 

Several measures that have been proposed in the Budget 2018 for agriculture sector, include increase in MSP for Kharif crop at 1.5X the producer price, investment of Rs 2000 crore on agri market infrastructure fund, Rs 500 crore for Operations Green, focus on micro irrigation, cluster approach to develop agri markets and increased allocation for agricultural credit at Rs 11 lakh crore. 

According to Rajeev Singh, Partner , Deloitte India, “Good rural focus (credit for agricultural activities increased from Rs 10 lakh crore to 11 lakh crore ) will primarily help to boost retail growth in rural market and thereby bring more growth in auto industry. For example, the minimum purchase value for kharif crops 1.5 times the cost will boost rural income thus driving demand for two-wheelers, farm equipments and LCVs in rural areas.”

Talking about boost from infra sector in automobiles, Singh said, "Increased allocation for infrastructure projects such as national highways (target completion in FY17-18 is 9000 KMs) and Bharat Mala project (target completion of 35,000 KM in Phase 1 at cost of Rs 5.35 lakh crore) for seamless connectivity in the union budget should give much needed push to the sector especially M&HCVs (Medium and Heavy Commercial vehicles)."

While, the government’s thrust of promoting rural development and farmer welfare in the Budget remains a positive for tractors. The impact of Budget 2018 on passenger vehicles will be neutral.

Says Subrata Ray, Senior Vice President and Group Head, Corporate ratings, ICRA, "Government has proposed increase in import duty on CKD units and CBU units, which will increase prices of luxury cars which are primarily imported. Luxury car segment is largely a price inelastic segment and its overall share in Indian car sales is less than 2 per cent, and hence hike in customs duty is not going to materially impact overall volume growth."

Roland Folger, Managing Director & CEO, Mercedes-Benz India, reiterated the same thing. “The increase in the basic customs duty of auto parts, accessories and CKD components varying from 5 per cent to 10 per cent, clubbed with the new Social Welfare Surcharge at 10 per cent, at a time when the auto industry is reviving, is unfortunate, and comes as a surprise. We believe it is going to impact the auto industry, the consumers and is also against the spirit of ‘Make in India’." 

"The auto industry ended 2017 on a positive note, where it grew despite multiple policy disruptions in the previous year; but the customs duty hike is likely to reverse the growth trend. The automobile industry is already subjected to one of the highest rate of taxes under the GST regime, and with the successful GST implementation and the government’s GST rate rationalization step in the recent times, the auto industry was expecting the government to formulate policies and take decisions that would create demand, create additional jobs and help the industry to grow. As the overall costs due to various duty increase is imminent, we are left with no option but to pass on the resulting increase in price to the customers."

Folger further added, “The increase in basic customs duty hike will highly restrict the growth of the luxury car industry and this will only result in the loss of additional revenue, which would have increased significantly with increase in volume. The auto industry which contributes 7.2 per cent of the GDP is likely to be affected and further job creation might be impacted with this decision. Further, since the customers will be burdened with higher maintenance costs, it is likely that this duty hike may delay their routine servicing, thereby affecting safety and environment at large."

The Budget 2018 also remained silent in terms of electric vehicles. 

Said Sohinder Gill, Director- Corporate Affairs, Society of Manufacturers of Electric Vehicles (SMEV), “As the EV Policy is not a part of the budget, we were not expecting any major announcement related to electric vehicles in today’s budget. However, we are happy to note that there are general announcements made today, which will support the cause. For example air pollution, higher excise duty for indigenization, increase in agriculture infrastructure spends as well as other announcements alike, which will directly and indirectly support the automobiles, especially two wheelers, hence giving a further boost to EVs.” 

“The only thing we were expecting from the budget was rationalization of GST rate i.e. currently 12 per cent for EVs and 28 per cent for EV batteries. Also, we had requested that GST should be made at least either 0 or 5 per cent for initial years. But we didn’t find any mention of the same.”

Hemalatha Annamalai, South Chapter Chief, SMEV and CEO & Founder Ampere Electric Vehicle, said “The budget intends active measures for promotion of rural infrastructure and agricultural for the country and thus, increasing income of rural people. And then, the renewed thrust to MSMEs to the tune of Rs 3,794 crore in the form of capital support and interest subsidy by 2022 will surely help meet the credit demands of many companies. Considering India’s Electric Mission 2030, continued government initiatives towards both rural and MSME empowerment, will help achieve mass percolation vis a vis electric vehicles in the country.”

However, she further added, “High tax (GST) on the EV components still remains a big concern for the industry, which this budget must revise to 5 per cent for all the EV components. Also, clarification on the extension of FAME scheme for the two wheeler EVs needs immediate government attention."