The final countdown to the Union Budget 2012 has begun, and the auto sector is looking for the green signal on further growth and investments. Consumers' expectations are changing rapidly, and new product launches in quick succession have become the order of the day across various segments.

On the corporate tax front, the primary expectation will be an increase in the general depreciation rates on plant and machinery investment, which will enable the industry to keep up with inflation and technological changes in the sector.

The field of hybrid and electric mobility has seen substantial investments across the globe. This is, however, in a nascent stage in India. Investments in this greenfield area require crucial subsidies and tax incentives, and the Government could look at exemptions from Minimum Alternate Tax and provide allowance for investments made on these alternative technologies. Further, the benefit of 200 per cent weighted deduction for in-house research and development that the auto sector now enjoys, should be extended beyond March 31, 2012 — at least, till 2020.

Advanced pricing agreements

Most global players have operations in India and have transactions with Indian counterparts on technical know-how, services etc. As a result Indian companies face various issues in transfer pricing. It is hoped that Advance Pricing Agreements (APAs) are introduced in the Budget, to allow companies to enter into long-term agreements with the Revenue authorities in respect of pricing of products and services for cross-border transactions with related enterprises. This mechanism will go a long way in reducing the litigation from a transfer-pricing perspective and provide long-term certainty to global corporations.

On the indirect tax front, there is speculation that an incremental ad hoc excise duty could be levied on diesel passenger vehicles. This hike, if implemented, could result in price hike of about 3-4 per cent on such vehicles and could lead to a slowdown in demand for such vehicles.

Telescoping of levies

Currently, an automobile manufacturer has to grapple with multiple taxes, such as basic excise duty, automobile cess, NCCD and education cess, among others. The Government should consider collapsing such multiple levies into a single rate of excise duty, which would somewhat ease the burden of the manufacturers in maintaining separate accounts, ensure seamless flow of Cenvat credit, and so on. It would also help the Government achieve its larger objective under Goods and Services Tax (GST) of aligning multiple indirect taxes into one. To intensify and promote research and development (R&D) in the automobile sector, the Government can consider providing Customs duty exemption on import of capital equipment to be used for R&D purposes. Finally, as planned earlier, the Government should consider abolishing CST altogether or bring down the rate from 2 per cent to 1 per cent and gradually phase out the same by next year, which would also align with the scheme of GST.

The auto sector is a significant contributor to industrial and economic growth and one hopes the Budget injects fresh impetus to help take this sector to the next level.

(N. Muralidharan is Associate Director, Ernst & Young and Amit Kumar Sarkar, Senior tax professional in a member-firm of Ernst & Young Global. The views are personal.)

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