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Budget 2016 - Mixed bag for auto

Gyanendra Tripathi     March 2, 2016

Gyanendra Tripathi
The auto industry had built up lot of expectations from this Budget given the Government push on ease of doing business and promotion of 'Make in India' initiative.

The auto industry is possibly the only industry which has a complex classification and duty structure, both under Customs as well as Central excise. Hence, the industry had built up a lot of expectation from the Budget. The expectation on the Excise duty rate being rationalised was also built up due to the recently published report of Chief Economic Advisor on the GST rates proposing a maximum levy of 40 per cent on luxury cars - this rate being slightly lower than the current effective rate of Excise duty levied for luxury segment. However, the budget seems to have sprung a surprise with levy of an additional infrastructure cess of 1 per cent, 2.5 per cent and 4 per cent depending upon the length, fuel type and engine capacity. Finance Bill has proposed additional classification being introduced for coverage of the above infrastructure cess which simply would go on to increase the back end work that automakers will have to undertake to comply with the additional levy.

While there were expectations around the announcement of Central excise concessions against scrapping of vehicles older than 15 years, rationalisation of duties on small and large cars, this has not been considered in the present Budget.  

The auto industry is also expected to increase spending on Research & Development for complying with tighter emission norms as also to meet stricter safety requirements. All of these costs will get bundled in value which is being subject to further levy. On the other hand, a plan for phasing out of the accelerated deduction under Income tax laws for Research & Development related expenditure has been charted out.

Another ingenious provision in the current year's Budget is introduction of tax collection at source at 1 per cent on luxury cars of value exceeding Rs 10 lakh. While the details are awaited, perhaps some clarity should be brought out with respect to value on whether it would be on ex-showroom price or on the price including taxes and local levies, if any.

On one hand, the Government has increased expenditure on infrastructure and creation of better road network and on the other hand there are increased duties through collection of infrastructure cess which is non-creditable.

While some may view this as a progressive way of making the sector self-funding, the auto industry will have to experience the performance within their sector to see whether this balancing of Budget bears fruit for industry or pushes it down further.

There is still no clarity on the date of implementation of Goods and Service Tax ('GST') expected to bring back buoyancy in demand in the sector by reducing the effective tax rates across various categories of vehicles resulting in lower costs to the buyers.

Easing of CENVAT Credit related provisions like allowing CENVAT Credit of the tools, allowing credit for moulds, tools, etc without bringing them to the factory of the manufacturer, allowing Input credit distribution to the job workers as well, allowing full credit of low value capital goods (upto Rs 10,000) in the first year are welcome steps.

It is hoped that the Government's commitment to increase the farmers' income to double in the coming five years, the 7th Pay Commission implementation would mean more disposable incomes in the hands of the people and could boost the demand for the sector in the medium term.

On a separate note, the increased disposable incomes by way of reduced personal income tax rates and increased deductions for certain class of taxpayers is also expected to add to the demand. Overall, it was a mixed bag wherein the sector was not in focus but the fiscal discipline and economic growth would stem and stimulate demand for the sector in the long run.

Gyanendra Tripathi, Partner, Tax and Regulatory, Ernst and Young LLP

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