Budget wish list from the auto sector

Over the last five years, India has established itself as one of the favored destinations for automobile manufacturing by global majors. Along side, it has developed a strong set of indigenous automotive and component manufacturers resulting in significant employment generation and economic development.

While recession, declining sales, depressed consumer sentiments and uncertainty over survival is the current background to the global auto industry, the situation may not be so bad in India. Despite the slowdown, the prospects of growth for the Indian auto industry are perceived to be strong, given that the country has a much lower vehicle population as compared to the developed nations. Most of the auto giants, be it Volkswagen or General Motors have expressed confidence in the Indian markets and are continuing with their India investment/expansion plans. However, it needs to be noted that consumer demand for new passenger cars is known to be discretionary spending and hence, can dip in an uncertain economic environment. Similarly, the fortune of the commercial vehicles segment is closely linked to the industrial production.

It is now up to the Government of India to reciprocate and undertake concrete steps to accelerate the revival of the auto industry in India. The Government under the fiscal stimulus packages has cut the excise rates for cars, commercial vehicles and auto components. Though, such measures are encouraging, they haven���t completely bailed out the auto industry; the same being one of the most severely impacted sectors in the current global meltdown. Radical actions are required to be taken keeping in view the long term perspective of making India the hub of the auto manufacturing.

Creation of special auto-component parks (akin to the concept of Industrial Parks), with specific direct & indirect tax benefits could result in significant reduction in the manufacturing costs and give the much needed fillip to the industry. Similarly, to boost consumer demand, deduction of interest paid on auto and two wheeler loans (under section 80C of the Income Tax Act) is also a measure that can be contemplated

Export is another area of grave concern given the global economic crisis, especially for the auto sector. Continuance of tax holiday for Export Oriented Units (EOUs), deductions for profits on exports for Small & Medium sector non- EOUs could be the basis of survival for some auto component manufacturers.

The challenge is all the more severe for commercial vehicle manufacturers. Although, the government has already notified a higher rate of depreciation (50%) for new commercial vehicles purchased before October 1, 2009, a continuance of the higher benefit for the rest of the fiscal year and other measures like investment allowance for acquisition of new plant & machinery, weighted deduction for technology upgrades and outsourced Research & Development, further reduction of the excise duty could help in reviving this beleaguered segment.

For promoting use of environment friendly fuel efficient cars, incentives for development of technology for hybrids and reduction in custom rates on import of energy efficient completely built units could be considered.

With the fiscal deficit riding high and the demands from all quarters being made for tax holidays and rate cuts, how much of the industry���s expectations and demand will be accommodated by the new Finance Minister, remains to be seen.

At a time, where the world���s largest & oldest car manufacturer, General Motors has sunk like Titanic; the lessons are there for all to learn. With the right policies and directions perhaps India can avoid repeating the mistakes.

(The authors are senior tax professionals with Ernst & Young, India)