Union Budget FY23: Reforms like GST cut, reintroduction of investment allowance, reduction on excise duty of fuels, measures for EV biz - likely for auto industry

1 Feb 2022 , 07:58 AM

The automobile sector will be in focus during the Union Budget 2023. The industry which is hit hard by the semiconductor shortages, lacklustre demand and sales, supply chain disruption, expects some major reforms for a speedy recovery from this Budget.

In its Union Budget expectations report, CARE Rating expects the following for the sector:

The industry seeks a uniform Goods and Services Tax (GST) of 18%, down from 28% on all auto parts, to curb the impact of counterfeits in the aftermarket operations. Allowing the availability of the input tax credit of GST paid on automobiles for businesses will increase vehicle sales to corporates. A moderate rate of 18% will not only address this challenge but will also enhance the tax base through better compliance.

Automotive Component Manufacturers Association seeks an upward vision of Remission of Duties and Taxes on Export Products to enhance investments, as the rate notified for the sector at 1% or lower, is inadequate to cover the incidence of un-refunded taxes and duties borne on export products. Moreover, a reduction in excise duty on fuel would reduce the running cost of vehicles and aid demand.

Eyeing higher capacity and new product development, as many as 115 companies have applied for the Rs 25,938 crore PLI scheme for the sector. Reintroduction of investment allowance at 15% for manufacturing companies that put more than Rs 25 crore in plant and machinery will motivate manufacturers to invest in new technologies, especially e-mobility and its components/ ancillaries.

Financing options and lower GST on raw materials to ensure the affordability of EVs are expected. Lowering or abolishing the 5% customs duty on lithium ion-cell batteries should also be in focus to reduce the cost of import in the short term while promoting battery production in India in the long term. The sector also seeks measures for faster disbursal of incentives, which would boost the sales of EVs.

The Economy Survey 2021-22 takes note of a report by investment bank Goldman Sachs 2021 stating that the supply chain disruptions in the semiconductor industry have spillovers in over 169 industries. The manufacturing of semiconductors requires a large amount of capital and has an average gestation period of 6-9 months. Moreover, it has a fairly long production cycle of about 18-20 weeks.

Hence, the survey said, “any recovery from the supply chain disruptions will be a slow and costly affair,” adding, “India has also experienced similar trends in the automobile sector.”

As per data from the Society of Indian Automobile Manufacturers (SIAM), carmakers sold 219,421 passenger vehicles in the domestic market in December 2021, down 13 per cent (YoY). “This is not a demand problem but a supply-side issue,” the Survey adds.