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India can use the increased import duties on luxury cars as a bargaining tool to not eliminate, or reduce, duties on the item under the proposed Free Trade Agreement (FTA) with European Union (EU).
Official sources told Business Line that a higher tariff barrier can even be used to get more benefits out of the EU in sectors of India's own interest, such as agriculture and services.
While much had been written about a negative impact on domestic auto sector investments on a possible halving of the import duty on luxury cars from EU in the FTA, Friday's Budget proposal pulled a surprise by instead increasing the customs duty.
The Government has proposed 75 per cent customs duty on fully-built cars above $40,000, a 15 per cent increase from the current levels. Largely impacting European carmakers such as Jaguar Land Rover, BMW and Audi, this indicates a higher priority that India attaches to promoting domestic manufacturing and protecting local interests, industry experts said.
It will also help increase revenues for a Government trying hard to reduce its fiscal deficit.
“First it was attempted to identify the different technologies for taxing luxury cars, but it was felt that such a move would create problems and would not be practical to implement. Since most such cars are diesel-driven, the impact of increasing duties across the segment will be more on the dieselised luxury cars,” an official explained.
Mr Vishnu Mathur, Director-General of Society of Indian Automobile Manufacturers, said, “There seems to be a contradiction – the Commerce Ministry wants to reduce import duties, while the Finance Ministry wants to increase it for higher revenues sake.”
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Europeans have been demanding a minimal or total elimination of the import duty.
So, reducing duties from 75 per cent to a floor of 30 per cent will be seen as a bigger drop, than lowering it from a 60 per cent base – giving India more “bargaining power”.
Mr Abdul Majeed, Auto Practice Leader at PwC, added: “After increasing the duties in the Budget, it will be difficult to drop it substantially in the FTA, but will definitely give India a stronger card to play with.”
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