The Hindu Business Line : Roadmap for auto SEZs

The launch of Tata Motors’ Rs 1 lakh carhas demonstrated to the world the capabilities of Indian engineers and the excellent combination of frugal engineering with world-class R&D.

With Indian players looking to adopt target costing and value addition as major drivers, cost-competitiveness is the only key to ensure success. The Budget should provide a clear cut strategy/ roadmap for the development of the country’s automot ive industry.

Export led-growth

Due to acute competition the margin in automobile industry is very thin, turning it into a volume-driven business. Higher volumes are possible only if both domestic and export markets are served.

The Government of India came out with the SEZ model to lend thrust to the manufacturing sector by offering tax incentives such as income-tax holidays, nil tax on inputs and so on, with special thrust on sectors such as automotive and electronic hardware which have huge backward and forward linkages and excellent employment potential.

As per SEZ regulations, any sale to DTA (domestic tariff area) from SEZ will attract normal customs duties applicable on such sales. Though customs duties on DTA sales are uniformly applicable for all industries, due to ITA agreement any DTA sales from electronic hardware and telecom SEZs do not attract duties and taxes. This has spurred enormous growth in these industries, which enable them to cater adequately to both domestic and export markets without any duty/tax implications.

Unlike direct imports, manufacturing in SEZ acts as a key driver for economic growth, creation of employment opportunities and other multiplier benefits.

The success story of electronic hardware and telecom industries under the SEZ model can be replicated for automobile industry only if the latter is allowed to effectively tap domestic market as well. DTA sales from auto SEZ should have a competitive advantage similar to ITA products. The Government can think of creative solutions such as:

* Permitting automobile industry in SEZs to sell 50 per cent of its production to DTA without customs duties and on payment of appropriate excise duties, based on a firm commitment that the remaining 50 per cent would be exported.

* Value addition alone should be taxed. The principle of “Goods alone should be exported and not taxes/duties” should be adhered to.

The above solutions will have no revenue implications as only exports will be duty-free (for which drawbacks, incentives are available in any case) and DTA sales is liable to appropriate duties/ taxes. These measures will indirectly aid the transformation of India into a manufacturing hub for global players.

Currently India has a share of about 3 per cent (2,019,808 units) of global vehicle production (Source: International Organisation of Motor Vehicle Manufacturers). The industry employs over 4.5 lakh directly and one crore indirectly. It is expected to grow 13 per cent per annum over the next decade to touch $120-159 billion by 2016. The total investments required to support this growth is estimated at around $35-40 billion (Source: India Brand Equity foundation). Each percentage increase in the country’s share in the global market will create additional employment opportunities for 2 lakh people directly and 33 lakh people indirectly.

Direct Taxes

Motor vehicles have an average life of 10 years only. However, the Income Tax Act has fixed the normal rate of depreciation on motor vehicles at 15 per cent under Written Down Value (WDV) method which is equivalent to around 20 years’ life. Considering the short life of cars, and in order to create additional demand for vehicles, the Government should increase the depreciation rates to at least 30 per cent.

Indirect Taxes

To stimulate growth, the excise duty on all passenger vehicles, including multi-utility vehicles, should be reduced to 16 per cent from 24 per cent. The duty on small cars should be further reduced to 8 per cent.

The rate of abatement for MRP-based levy of automobile spare parts was fixed a long time ago and does not capture the entire margins. Hence the rate should be increased to at least 55 per cent.

Certain products like stainless-steel sheets/ coil of width exceeding 600 mm attract customs duty of 7.5 per cent, which should be reduced to 5 per cent or even zero.

R&D cess, a product of pre-liberalisation era, levied under R&D Cess Act, 1986 should be abolished to enable technology transfers from global players to their Indian counterparts.

As part of environmental protection measures, Government should promote alternative fuels like Compressed Natural Gas (CNG), Liquefied Petroleum Gas (LPG) and vehicles which comply with higher levels of Bharat and Euro emission standards by way of reduction in excise duty on such vehicles and their parts/components.

The author is Associate Director, Ernst & Young