Last year was the year we’ll talk about for decades to come. For the automotive sector, the 2020 story is about the industry’s determination and determination to overcome the downturn (sales decline of around 80% in first quarter) it has faced globally since COVID-19.
Sales improved in the second half of the year, promising a better year for the auto industry in 2021.
With the growing preference for personal mobility, the rapid adoption of digital practices by industry to serve consumers, the improvement in spending over the holiday season, and strong rural demand, the Indian automotive sector has seen early signs of recovery in some segments and looks cautiously into the future until next year for general recovery.
However, the industry will certainly need economic stimulus and relief from the Union budget 2021-22, and great expectations are expected from all stakeholders in the sector.
Such relief, which spans multiple areas like direct and indirect taxes, segregated budget allocations, political announcements, etc., is expected to fuel India’s automotive growth story and give the industry the respite it needs to deal with it.
The government also announced in November 2020 that it would include the automotive sector in the PLI (Performance Linked Incentive) program with a capital outlay of Rs. 57,042 crore. While the details of the PLI system are still to be determined by the Department of Heavy Industry, some of the sector’s longstanding demands for increased demand and vehicle penetration are still pending.
The reduction in GST rates for vehicles from the current 28% to a moderate 18% and measures to improve disposable income are expected to help increase demand for motor vehicles.
This may seem challenging given the limited fiscal space the government has, but any measure of such rationalization by the GST Council of India could broaden the GST base for compliance and be seen as a cheer by the industry.
Additionally, an increase in demand can partially offset the decrease in tax revenue for the government.
The Ministry of Road Transport and Highways has developed a detailed proposal to introduce a scrapping policy to phase out older and more polluting vehicles that are more than 15 years old.
As advocated by the Society of Indian Automobile Manufacturers (SIAM), an incentive-based scrapping policy in the upcoming budget is designed to fuel demand for new vehicles and help the government meet its carbon emissions reduction goals.
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Since the lockdown, the RBI has lowered the repo rates by 115 basis points, thereby lowering the interest rates on loans. Lower interest rates give the government the ability to expand the availability of tax deductions for interest on EV loans.
Currently under Section 80EEB, a tax deduction of up to Rs. 1.5 lakhs can be claimed on interest on loans to purchase an electric vehicle. As the government wants to push green initiatives like electric vehicles, adopting lower emission standards, etc., it needs to focus on streamlining import duties on certain products / components and abandoning the 5% duty on battery cell manufacturing in India.
The industry will look forward to actions to encourage investment in electric vehicles, including their ancillaries.
Also read: Luxury automakers expect lower taxes on automobiles in the upcoming budget
Any policy to promote R&D in the automotive industry under the Atmanirbhar Bharat could stimulate foreign investment in India for the development of new and cleaner technologies.
In addition, reintroducing an additional 15 percent deduction for investments in machinery and equipment under income tax laws for a period of at least two to three years would give investors a clear roadmap for planning investments in the automotive sector and further the country’s domestic production target to strengthen.
(Rajeev Singh is a partner and automotive leader at Deloitte India; Anish Mandal is a director at Deloitte India.)