Auto Component Industry: Pre-Budget Recommendations

The fortunes of the auto ancillary industry are linked to the automobile industry so that if one does well, the other does too. As of now, however, the auto industry is passing through a lean phase which has been impacting the auto component industry in terms of margins. The December quarterly numbers for the Indian auto component industry clearly reflect this trend. Moreover, if one scans through the results of the auto component industry, one would observe that there are many medium and small players in the industry. It is estimated that India’s auto component industry is pegged at USD 40 billion and mainly caters to the domestic market with exports accounting for about USD 5 billion.

Meanwhile, with the quality of the finished products i.e. the vehicles reaching greater heights, the most pressing requirement for the component industry is to upgrade its operations with new features that call for better technology and execution. One of the biggest demands from the Auto Component Manufacturers Association (ACMA) this time to the finance minister is related to the Technology Upgradation and Development Scheme so that the industry can invest in technology and scale capacities to reach a world-class and world-scale level. The demand from ACMA is on the same level as the one that has been extended to the textile industry in the form of a Textile Upgradation Fund (TUF) so that auto component manufacturers can receive loans at cheaper rates.

One area that has been causing the sector a lot of anxiety is the likelihood of a reduction in the import duty on cars from Europe. If that happens, importing car would become cheaper and in turn it would reduce the demand of locally made auto component products. We expect the Union Budget to be no big winner for the sector as the auto industry (user industry) is likely to receive some additional tax imposition. Hence, we are skeptical that any benefits that may accrue in favour of the auto component industry. However, we are hopeful that the government may accept the suggestion of establishing a TUDS for the industry as this segment offers good number of employment to local people. In other words, giving sops to auto component manufacturers makes economic as well as political sense. 

Acma Budget Expectations

INDIRECT TAX RECOMMENDATIONS

Customs

• Eliminate customs duty on alloy steel and secondary aluminum alloy i.e. all items falling under HS Code 7208, 7220, 7222, 7223, 7224, 7225, 7226, 7227, 7228 and 7229 to nil.
• Domestic steel / aluminum alloy suppliers benchmark their prices based on the international prices and the customs duty thereon, etc, thus making the inputs expensive.
• Raw material needs to be made available to domestic component manufacturers at international prices to be competitive and ensure a level playing field with FTA countries.

1. 100% Cenvat Credit On Capital Goods In Year Of Purchase
   
   • Currently 50 per cent cenvat credit is allowed on capital goods in the year of purchase with the balance 50 per cent to be availed in subsequent years.
2. Unutilised Cenvat Credit Balance
   
   • Need a provision to provide for refund of unutilised credit amount periodically.
   • No levy of interest on suo motto reversal of unutilised cenvat credit.
3. Allow Input Credit On Diesel
   
   • Manufacturing units should be allowed to avail input credit on diesel procured for internal power generation and industrial use.
4. No Interest For Differential Excise Duty Paid Due To Price Increase Subsequent To Sale Of Goods In Case Supplies Made To OEMs.
   
   • It is suggested that the following explanation to Section 11 AB of the Central Excise Act 1944 should be added: “No interest is however payable on account of differential duty paid/payable arising of any revision of prices subsequent to the removal of goods which is supported by proper proof and documentation as to genuineness of the subsequent revision”.

1. Phasing Out CST
   
   • Need to reduce multiplicity of applicable taxes with an early implementation of GST.
   • Last three years’ CST remained at 2 per cent. It is recommended that CST be removed or reduced to 1 per cent pending GST.

DIRECT TAX RECOMMENDATIONS

Direct Tax

1. Corporate Tax Rate
   
   • The corporate tax rate for domestic companies is currently 32.445 per cent (including surcharge of 5 per cent and education cess of 3 per cent). It is suggested to bring down the effective tax rate for domestic companies to 30 per cent.
2. Depreciation Rate
   
   • Current depreciation rate of 15 per cent on capital goods.
   • Request to enhance rate to 25 per cent to encourage investments.
   • To encourage usage of domestically manufactured capital goods, an even higher rate of depreciation should be given.
3. In-house Research & Development
   
   • To encourage investment in R&D, a long-term sustainable policy is needed.
   • Presently weighted deduction under Section 35(2AB) of the Act is available for in-house research and development facility till March 31, 2012. This should be extended.

CORPORATE SOCIAL RESPONSIBILITY (CSR) EXPENSES
To encourage CSR activities, 100 per cent tax benefit should be provided.