The Hindu Business Line : Budget steers clear of auto lane

After being in focus in the past three Budgets or so, the automobile industry was conspicuous for not getting adequate any attention in the 2007 Budget.

With measures to boost demand for passenger vehicles and for promoting India as a potential hub for the manufacture of small cars announced in the last two Budgets, the build-up for the Budget this year was strong.

Clearly, the auto industry is disappointed by the lack of any concrete measures to promote the industry.

There are also a few clarifications that the industry was looking forward to get from the Finance Minister. But, unfortunately, much of the demands made by the auto industry were met in this year's Budget.

Nevertheless, there are a few proposals that will have positive fallout directly or indirectly for the industry.

RATIONALISATION OF EXCISE

The automobile industry has been almost unanimous in pointing out that the opportunity to rationalise and bring on par the excise duty applicable for all classes of cars has been lost.

In a move to offer preferential treatment to small cars, last year's Budget had reduced the excise duty on small cars to 16 per cent, while maintaining it at 24 per cent for all other cars and utility vehicles.

In addition to a few cars that are just a little over the stipulated 4,000mm for being considered a small car for purposes of the lower excise duty, there are a number of them in the wings that are as yet unviable for local manufacture because of the differential rate.

The auto industry has also been trying to point out that the differential excise duty alone cannot be enough to promote India as a small-car-manufacturing hub, though domestic demand will receive a boost from the lower tariff.

There is also a bit of confusion regarding the definition of a small car with last year's budget defining it as one which has a overall length of 4,000mm and below. However, the auto policy document defines a small car as one with an overall length of 3,800mm or lower.

IMPACT OF CESS

The reduction of Central Sales Tax (CST) from 4 per cent to 3 per cent has been welcomed by the auto industry, as has been the case with the other industries too. However, the benefit to car buyers is likely to be blunted by the additional education cess of one per cent.

The auto industry has also criticised the imposition of service tax on design services, which would go on to make sourcing such services in India more expensive.

The reduction in the peak rate of Customs duty from 12.5 per cent to 10 per cent is widely expected to benefit automobile components manufacturers.

However, there is concern amongst commercial vehicle manufacturers that the reduction may make import of cheap or used commercial vehicles from low-cost economies in the region viable.

R&D

Amongst the benefits that could accrue directly to the auto industry is the continuation of the weighted deduction of research and development (R&D) expenditure under the Income-Tax Act for the sector for the next five years.

This could actually turn out to be a factor that could promote further investments in testing and developing small cars.

The continuation of the current Customs duty structure on cars and two-wheelers has been welcomed by the industry. And the Society of Indian Automobile Manufacturers (SIAM) points out that this status quo in rates would encourage value addition in the domestic economy, which will, in turn, also generate additional employment.

The other features in the Budget that could have a positive impact on the industry is the increased outlay on roads, both national highways and rural roads. According to SIAM, the higher outlay for the Urban Renewal Mission and its focus on transport would also help improve public transportation in the country.

BIO-DIESEL

Another Budget announcement that would cheer the auto industry is the excise duty exemption for bio-diesel.

With a number of companies looking at the bio-diesel option, the Budget sop will enable the increased penetration of this alternative fuel. Companies such as DaimlerChrysler and Mahindra & Mahindra have already adapted and tested some of their vehicles to run on bio-diesel.

One other announcement by the Finance Minister that will indirectly benefit an industry that is fast getting starved of skilled labour is the increased outlay for ITIs (technical institutes).

Companies such as Toyota Kirloskar Motor and Hyundai Motor India are already tying-up with local technical institutes for simultaneously training and educating students who may later join them.

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