Budget Expectations: Auto Sector

24 Jan 2022 , 03:12 PM

The auto sector finds itself in an unenviable position. Firstly, there is the challenge of erratic consumer demand, which tends to balloon and vanish with equal speed. Secondly there is the global shortage of microchips that is forcing auto companies to cut production. Thirdly, it is still not clear how big will be the disruption caused by EVs, but valuation stories are shifting out of traditional automobiles. It is in this context that the Union Budget 2022 will be presented by the Finance Minister on 01st Feb 2022.

10 things that the auto sector is expecting in Budget 2022-23

One of the basic demands in any Union Budget is that more spending on consumption boost will increase purchasing power and boost auto sales. But that is still too macro. Here are some interesting micro level expectations of the auto sector.

1. Dealers have been demanding that the Income Tax Act provides benefits of claiming depreciation on vehicles for Individuals. This facility is currently available only to businesses, which is normally passed on to employees. Instead, the government can directly offer depreciation rebate on cars to buyers. This can be extended to salary income also.
2. During the slowdown in auto sector growth, the government had offered additional depreciation on vehicles as a temporary measure to boost growth. That facility had expired in Mar-20 and the auto sector has been demanding an extension of this facility for another 3-5 years to boost growth.
3. GST rates have been a major thorn in the flesh for auto sector. Currently, automobiles are taxed at 28%, which is the non-merit rate of tax applied to cigarettes and similar products. The Budget can at least make a start and rationalize the GST rates and bring it to more acceptable rate of 18% GST to reduce the cost of cars. This will partially offset the persistent price hikes that car sellers are effecting due to input cost spike.
4. The used car market has been growing rapidly and in most countries there is a robust and institutionalized secondary market for used cars. However, the GST for used cars range from 12% to 18%, which is a sort of double taxation. One demand is to reduce this GST on used cars to 5% to create a buoyant market for used cars in India. Online automobile marketplaces can play a big role in this thrust.
5. To boost the manufacture and sale of electrical vehicles (EV), easy funding options are required. While the government has offered additional tax incentives in the form of rebates on EVs, getting bank funding is a challenge. One way is to classify EV related lending as priority sector lending, so banks will automatically enhance their lending.
6. For the EV (electrical vehicles) segment to grow in an organized manner, there is the need for appropriate infrastructure like EV batteries and EV charging stations. EV batteries are based on lithium-ion or nickel-cadmium or nickel-metal hydride or solid state models. The need of the hour is to encourage EV models that are suited to minerals available locally. The R&D for the same can be incentivized by the government by creating a dedicated fund and also giving 200% deduction for such spending.
7. One of the lessons India learnt from the sugar surplus was that a small push from the government can go a long way in boosting exports. India can create a niche in export of small and compact EVs with a little push from the government in the form of subsidies. India created a robust auto industry based on internal combustion engine. That can be replicated for EVs.
8. It is time to tweak the production linked incentive (PLI) scheme for the auto sector. The PLI scheme is favouring large players and puts the smaller players at a disadvantage. Since size is the criteria for PLI, most smaller names do not qualify. One way is to allow all the existing MSME EV players to participate in the PLI scheme.
9. Budget must look at special incentives for auto start-ups driven by innovation. There is already the Fuel Entrepreneur initiative of the government that focuses more on sustainable growth. This can be extended to other innovations to the auto ecosystem including online diesel delivery, EV ecosystem disruption etc. Budget can create a unique set of incentives for the small and medium sized businesses in fuel entrepreneurship.
10. There is a quiet change that is happening on the way people prefer to own automobiles in India. It appears to be more of shared mobility, subscription-based purchase etc. What this pre-supposes is the existence of a proper lease and rental agreement and the budget can provide a lot more clarity on how such deals can be structured and how the depreciation benefits can be passed on. Income Tax Act will also require tweaks to the lease arrangements.

The budget is likely to be crucial for automobiles. As we said in the beginning, this industry is in a state of flux in terms of supply chains and the EV disruption. The onus is on the government to give a push in the right direction.