Budget 2016 And The Auto Sector – Is This Going To Be The Year Of A Turnaround?

Budget 2016 And The Auto Sector – Is This Going To Be The Year Of A Turnaround?

Sridhar Venkatachari, Partner-Advisory at Grant Thornton India, explores whether the Budget 2016 brought any solace to the auto sector

SRIDHAR VENKATACHARI
SRIDHAR VENKATACHARI

Manufacturing in general and the automotive sector in particular have been through testing times the past couple of years. With Make in India becoming a buzzword, has Budget 2016 brought any solace to the auto sector?

While many believe there was nothing in particular to kick the auto sector out from its slow, lazy amble to a salubrious sprint, the budget had a fair amount of directional indicators to move them into a bold stride in the short-term and then to a faster pace over the medium and long term.

It all started with the railway budget, which initially indicated good times for this sector with the Government committing investment for establishing a freight corridor between Chennai (where several automobile OEMs are located) and New Delhi (the largest market in India for passenger vehicles) and creation of a Rail Auto Hub (yard to store vehicles for trans-shipment) near Chennai to take care of the logistics, rationalization of freight tariff and a freight time table facilitating speedy, cost efficient and timely movement of large volume of vehicles.

The initiatives under this budget for farmers’ welfare and agriculture as more land is brought under irrigation and organic farming, means well for the auto sector, leading to increased demand for tractors and accessories like tiller machines. The government claims that it has been efficient in completing road projects with about 100 km laid per day from about 76 km per day the previous year.

Accordingly, they expect to cover rural habitations through 2.23 lakh kilometers of road by 2019 in partnership with various state governments and about 10,000 km of National Highways in 2016-17. Also, about 50,000 kilometers of state highways are also to be taken up to be upgraded to national highway status during this period. New life is being infused into delayed and suspended road projects through the Public Utility Bill, for dispute resolution and provide guidelines for renegotiation of concessions. Incentives for employment generation like contributing to EPF for employees newly enrolled for the first three years of employment with a salary up to 15,000 p.m; deduction U/s 80JJAA at 30% of the cost for new employees for three years so long as their emoluments does not exceed INR 25,000 pm and have worked for 240 days is expected to improve employment and bring in more consumers.  All this focus on expanding the base through employment, rural and infra initiatives is expected to have a multiplier effect and help the sector in the long run.

One of the direct measures impacting the growth was the promise to enact necessary amendments to the Motor Vehicles Act, opening up the road transport in the passenger segment to private players.

A dampener in the scheme of things was the tax measures taken up in the passenger vehicle segment, especially cars. The government has introduced a tax collection at source of about 1% on purchase of luxury cars exceeding value of INR 10 lakhs, and an Infrastructure Cess ranging from 1% to 4% of the assessable value of different categories of cars. While the first one could be an additional cost of ownership to non-tax payers/non tax assesses, it may not impact the tax assesses, since it will be deduction against their overall tax liability. Also with a value limit of INR 10 lakhs it could bring the non-luxury cars also within its purview since the higher end of most compact sedans and compact hatches are being valued at more than INR 10 lakhs. This is going to be disappointing to the millennial and the aspirational car buyers amongst us. The Infra cess will certainly impact the cost of ownership and could affect passenger car sales in the short and medium term.

However, the base rates of excise duty and customs duty have not been touched. There are favorable changes to the CENVAT rules, facilitating credits to outsource manufacturing unit, principal manufacturer even if specified goods are sent to job worker. Hybrid and electrically operated vehicles have the benefit of concessional duty of 6% on specific goods used to manufacture them. The same has been extended indefinitely sending strong signals to the OEM’s to look at Make in India seriously.  To meet the expectation of the industry, Budget 2016 could have provided some more positive tax impetus for growth to the struggling industry, which amongst other things will soon face the brunt of developments under Industrie- 4.0; like reduction in excise duty for large cars, incentive for scrapping of old vehicles and GST.

The performance of the auto sector post budget appears to have put the brakes on growth, especially in the passenger car segment. A positive in the environment is the high double digit growth exhibited by the commercial vehicle segment. Two wheeler segment have been impacted by lack of demand in rural areas.

Increasing focus on working up the rankings on ease of doing business, seriousness shown by the government to implement GST and build on the transformative agenda with nine distinct pillars augurs well for the Make in India, manufacturing and auto sectors. With low interest rates kicking in late 2015 and fuel price remaining low, the auto Industry seems to be well on track to achieve double digit growth as estimated by SIAM in 2016.


About the author: Sridhar Venkatachari is Partner-Advisory at Grant Thornton India LLP. Sridhar has over twenty-eight years of experience in the areas of Accounting, Auditing, Finance, Tax and compliance.