Automobile
India is clearly emerging as one of the key auto component centres in Asia and expected to play a significant role in the global automotive supply chain in the near future. The current disadvantage for Indian manufacturers include relatively higher costs of some key inputs like capital, power and high administrative costs. It is also now a well-accepted principle that employment generation and sustenance is much more in the auto component industry than in vehicle assembly. Growth Vision can be achieved with an innovative and conductive tariff policy, which encourages local value addition at least for the next two to three years, during which further reforms in the economy would hopefully create a level playing field for Indian manufacturers.
ACMA has suggested the following issues for consideration for incorporating in Auto Policy for improving the status of Indian auto components industry :-
1. The need for Sectoral policies:- The Ministry of Heavy Industry as well as the Ministry of Commerce have identified auto-components as a Thrust Sector for growth as well as for Exports. In view of this the Ministry of Heavy Industry has, after, extensive deliberations with industry evolved an Auto Policy. The Ministry of Commerce has also unveiled their Medium Term Export Strategy under which Auto-Components has been identified as a Thrust Sector deserving special support from Government for boosting exports. However, these policies largely remain on paper. When it comes to the implementation of these policies, Government prefers to pursue “standard” policy that could be implemented uniformally on all the industry sectors. This deprives the auto components sector to have any special fiscal or tax related dispensations on any individual industry sector and also any special export incentive on this sector.
Under the circumstances, the concept of Thrust Sectors becomes meaningless and ineffective. Government has to recognize that the measures required to develop different industry sector will be different and what is good for the textiles sector may not be the right prescription for the auto-components or pharma sector. Therefore, Ministries should operate like a “Team” and have the political will to establish Sectoral Development Policies like most of other developing countries have. For example South Africa, China, Thailand, etc. all have very clearly defined Auto Policies. These policies are not general or standard policies, but very clearly enunciated policies applicable only on the automotive sectors.
2. Customs duty of components:- The WTO Bound rate for auto-components is 40%. However, India has unilaterally dropped the actual applied rates to 30% and planning to further reduce this to a level of 10%-20% by 2005. No other country has done this. This will result in a major competitive disadvantage to the Indian industry in two ways:-
(a) The developed countries are insisting that the fresh negotiations on the new Tariff Bindings should start from the actual applied rates and not the previous Bound rates. Hence, when India goes in for the next round of tariff negotiations, the base rates would be taken as the actual applied rates which will be much less than the bound rates of 40%. This would put India in a major disadvantage vis-à-vis countries which are maintaining their applied tariff rates at the Bound levels.
(b) It is a well recognized fact that as long as tariff rates are high, technology flows into the country. This is because it becomes difficult for global companies to export fully manufactured products into the country having a high tariff rates. Hence, the companies are encouraged to establish manufacturing operations within the country thus resulting in an inflow of technology.
In case of drastic drop in the tariff levels unilaterally, it would have a very adverse impact on the inflow of technology into the country. In order to ensure that local value addition continues to receive the necessary incentivisation and encouragement, it would be important to maintain the import tariffs on auto-components at the current levels for the next 2 years. There should be a single rate of Customs Duty for all finished products. In fact the import tariff for all auto components (SKDs, CKDs, etc.) should be the same as that of automobiles. A single rate of duty would be necessary to avoid the age-old debate of what is an intermediate product and what is a finished product. In order to promote local value addition, it is important that the customs Duty of raw materials should be progressively reduced. The Government should ensure that at no point of time should they be higher than that of finished products.
3. Customs duty exemptions on special products should be time-bound:- Government allows concessional rate of Customs Duty on specific products due to a variety of reasons. The reason is the non-availability of local manufacturing capacity for that product. However, once a Concessional Customs Duty is granted, there is no mechanism for a periodic review to see whether there is need to continue with the concessional duty. This puts the local manufacturing industry at a big disadvantage compared to imports that continue to come in at highly concessional duties while the local manufacturers who establish the capacity have to pay the full local taxes and duties. In most cases, the Customs Duty on the raw material of the product also remains at high levels thus rendering the local manufacture of the product completely unviable. This has actually happened in the case of catalytic converters in the auto component industry. A Concessional customs Duty was granted to Cat Cons in year 1998, at a time, when it was mandated by the Government and there was no domestic manufacturing capacity. Over the last 4-5 years, more than 8 companies, including MNCs have established domestic manufacturing capacity. However, the concessional duty on the Cat Cons still continues to be applicable, while the duty on the raw material is 30% due to this duty anomaly, these companies. ACMA’s suggestions is that any Exemption or Concessional customs Duty should have a time-bound applicability validity. Such concession or exemptions should be extended only after a proper review of the situation and after consulting all the concerned parties i.e. the manufacturers and the users of the product.
4. VAT:- In this context, ACMA has the following suggestions to make:
(i) In order to improve competitiveness of the industry, the removal of the multiple taxes which is prevalent in the Indian tax system is absolutely essential. CST should be therefore removed at the first instance.
(ii) VAT should also ensure that all barriers to inter-state trade and commerce should be removed and a unified national market is created.
(iii) The Vat system should also ensure that there is simplicity and transparency in the system.
(iv) Ensuring revenue neutrality should also be the primary objective of a VAT regime.
(v) The scope of VAT should cover set-off for service tax.
(vi) With the introduction of a Revenue neutral Rate (RNR) all other taxes should be abolished. Therefore, the move by some states to introduce other forms of taxes will go against the basic purpose of unification of taxes expected in a VAT regime.
5. Weighted deduction for investment on R&D:- Under Section 352AB(1) of the Income Tax Act, a weighted deduction of 150% is provided for investment made on R&D by companies engaged in production of drugs, pharmaceuticals, electronic equipment, computers, computer software, helicopters, aircraft, telecommunication equipment and chemicals.
The auto component sector is a very vibrant sector of the economy. Development of new vehicle models and introduction of a roadmap for emission norms by the Government has given a boost to a considerable amount to the manufacturers. ACMA therefore suggested that the benefit of 150% weighted deduction for investment made on R&D may be extended to auto component manufacturers also as it has been done in the case of other notified industries under Section 35 2AB (1) of the Income Tax Act.
6. Income tax benefit to exporters:- Over the years exporters have lost substantial provision of 80HHC benefit which will be phased out in due course. Apart from this Indian exporters have also lost on the following counts:-
(a) SIL benefits are no longer available
(b) Both inland & marine freight rates have gone up
(c ) Insurance premium rates have also gone up
(d) Power & fuel costs have risen
In order to mitigate the difficulties of exporters in a highly competitive global environment, ACMA would request the Government to consider giving additional deductions of up to 10% on Income Tax to exporters who are net foreign exchange earners (NFE).
Section 145A of the Income Tax Act may be deleted.
100% depreciation rates for Wind Power Electric Generators should be restored for Export House; Surcharge on Income Tax should be withdrawn; Depreciation should be aligned with rates prescribed in Companies Act, 1956.
7. DEPB Scheme for exports :- Auto component exports has been growing at 25% per year in last 4 years. To a large extent this has been possible due to our competitiveness in the world market. The future quantum of growth is expected from exports to OEMs and Tier 1 companies abroad where pricing is even more competitive. Hence, at this stage withdrawal of DEPB will be very detrimental to our export effort.
The DEPB scheme should be continued at least for another 3 years by which time we would have created a reasonable market share for Indian Auto components in the global market. Even if the DEPB Scheme is removed by the Government, another alternate Scheme should be in place besides Drawback which will enable the auto component sector to remain on the track of growth.
8. Inclusion of automotive components and automobiles in bi-lateral trade treaties: – Trade treaties between countries are increasingly influencing international trade. Since India is not a member of any trade bloc outside South Asia, trade treaties have become particularly important for gaining favorable access to overseas markets. Since the latest generation cars and high quality components are now being produced in India, there is a good potential for exporting automobiles and components from India. Inclusion of automobiles and auto components in trade treaties that India signs with other countries can help promote such exports from India. Automobiles and auto components may be included in the Bilateral trade treaties between India and countries which represent a good potential for partnerships in the component industry, e.g. Iran, Uzbekistan, Egypt, South Africa, Turkey, Tunisia, Brazil, SAARC countries etc.
9. Market development assistance for exporters :- Every country, including the developed countries e.g. USA, UK Canada, EU countries, China etc., provide Market Development Assistance to their industry for international marketing efforts. We see that all the international participation of their industry in major auto shows and fairs including the cost of delegations and business meetings are subsidized by Government. All the subsidy is provided to the industry through the medium of their industrial associations.
In India we do have a Market Development Assistance (MDA), but this is made available only to the companies directly and does not allow projection of the Indian image as a whole. ACMA would strongly recommend that in keeping with the international practice, such marketing support should also be provided to the concerned industry association for image building activity. This could include the following:-
(i) Supporting Marketing Delegations in target countries
(ii) Participation in Specialized International Trade Fairs
(iii) Conducting Market studies
(iv) Organizing Buyer-Seller meets
This Fund should also be disbursed through Sector specific industry associations in order to enable quicker and more efficient utilization of the funds for the benefit of the concerned industry.
10. Sale of Spurious Automotive Parts :- Every year thousands of people die on Indian roads due to accidents. These accidents usually occur due to vehicle failure. These failures usually occur due to poor vehicle maintenance which includes fitment of spurious auto components in the vehicles. Over the years ACMA has been actively involved in Public Awareness Programmes regarding identification of spurious parts amongst the general public.
Since the spurious auto parts industry is a huge grey market, the auto component industry requires the full support of the legislation as well as of the law enforcers if we have to rid our country of the cancer of spurious parts. Taiwan which was known for its counterfeit products 10 years ago has been able to control this very effectively through legislation and effective implementation. It was stated that the policy makers need to take lessons from cases like Taiwan and address this challenge in right earnest at home.
The industry requires the full support of the legislation as well as of the law enforcers if we have to rid our country of the cancer of spurious parts. Taiwan which was known for its counterfeit products 10 years ago has been able to control this very effectively through legislation and effective implementation. It was reiterated that the policy makers need to take lessons from cases like Taiwan and address this challenge in right earnest at home.
Manufacture and Sale of spurious auto components should be made a cognizable offence through parliamentary legislation. Effective implementation of this law will enable the component industry to rid the country of spurious auto parts.