Incentivise automobile R&D, introduce cash for clunkers scheme, reduce excise

The automotive industry in India is one of the key reflectors of the Indian economy. It accounts for around 7 per cent of the country's gross domestic product (GDP) and is one of the largest employers in the economy. 2016 is expected to be a significant year for the industry, which is witnessing increased regulatory activity and some bold decisions by the government and judiciary, battling high pollution levels in Delhi and other metros.

Although the economy is on the upturn and fuel prices are low, there are pockets in the automotive sector where demand is tepid. Further, it is believed that the overall market is likely to gradually shift in favour of petrol and eco-friendly cars (being relatively less polluting).

Considering the inherent potential of the industry and its challenges, the auto industry is looking forward for support from the government to provide further fillip to the industry. Some of the key expectations of the automotive sector from the Budget are as follows:

• Higher Depreciation Rate: To encourage capital investment required to replace obsolete equipment, the rate of depreciation on capital goods be increased to 25 per cent from 15 per cent. Further, domestically manufactured capital goods sourcing be encouraged by allowing 40 per cent depreciation on them.
• Incentive to in-house and third-party R&D: R&D is an integral part of the auto industry and therefore, the benefit of weighted deduction on expenses should also be extended to expenses incurred towards third party R&D service providers to encourage local designing of products. Cost of land/ building for setting up R&D facility should also be included in existing R&D deduction. Further, the allowance for weighted deduction should be prescribed under Minimum Alternate Tax regime as well. It would also be useful to clarify that the expenses, such as development expense of prototype and road constructed for test track etc, are eligible for weighted deduction.

Further, inputs and input services used for R&D purpose should be exempted from Customs duty, Excise duty and Service tax respectively.

 

 

• Broader scope of investment allowance: In order to increase capacity in this sector, quantum of benefit under investment allowance should be enlarged to include the amount invested in a new building as it constitutes a major portion of the total investment. The existing provision should also be amended to allow deduction in the year of installation rather than on the basis of meeting combined test of 'acquisition and installation'.
• Corporate Social Responsibility (CSR) expense: As Companies Act, 2013 mandatorily requires corporates to spend on CSR activities, CSR expenditure should be allowed as a deduction, irrespective whether it is specifically allowed or not.
• Cash for 'clunkers'- To boost demand and keeping environment concerns in perspective, the industry is in huge need of a scheme that could be in the form of excise incentive/ cash support for car owners to give up their old vehicles (aged 10-15 years or more).
• Early implementation of uniform GST regime: GST is expected to provide a boost to manufacturing and exports through increased competitiveness in the international market, and the auto sector is keenly looking forward to announcement of the government's commitment to early introduction and a clear roadmap to GST.
• Reduction in Excise duty: The effective rate of tax paid by a consumer on vehicle ranges from 26 per cent to 50 per cent depending upon the class of vehicle (due to cascading of taxes). The government needs to revisit its position vis--vis the Excise duty rates for auto industry and reduce the rates to order to provide some impetus for growth.
• Credit of Excise duty against NCCD: The manufacturers face practical challenges in paying NCCD through CENVAT credit. Necessary clarification should be issued for hassle-free adjustment.

(The author is Tax Partner, EY India. Views expressed are personal)

 

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