Ahead of the Union Budget, the auto industry is of the view that while the government has been an enabler on a number of fronts, including adoption of electric vehicles and promoting research and development, many issues still remain unresolved.
One of the key demands raised by the industry stakeholders is a simplified classification and goods and services tax (GST) rate structure for automobiles and auto components, which is done under the HSN (Harmonised System of Nomenclature) and has only led to increased complexities and incorrect classification for auto companies.
“A simplified nomenclature will enable ease of doing business, especially for original equipment manufacturers (OEMs) and will also eliminate any kind of unhealthy compliances, reduce unnecessary litigation. Hence, it is recommended that the government considers a structure where similar components are categorised under the same bucket,” an tax expert said.
Finance Minister Nirmala Sitharaman will present the Union Budget 2025 on February 1. It should be remembered that the budget can tweak taxes like income tax, capital gains tax, corporate tax, excise and duties, but not GST, which is the purview of the GST Council.
However, the central government can announce the proposals it expects to put before the GST Council, in the budget speech.
Another demand is to bring changes to the eligibility for production linked incentive (PLI) scheme for the auto sector. Right now, one of the conditions is regarding an investment of at least Rs 3,000 crore in fixed assets, which benefits larger players but ends up excluding start-ups.
“The kind of investments that are required on the OEM levels are also very high. So it’s not possible for all the startups to qualify for the PLI scheme because they cannot commit that kind of amount,” another tax expert said.
However, others argue that start-ups can collaborate with larger vehicle manufacturers and component makers and take advantage of the PLI scheme.
On balance, most experts are of the view that there are certain shortcomings of this scheme, including a stringent domestic value addition (DVA) computation which is the percentage of a vehicle’s value that is produced domestically. A minimum 50 per cent DVA is a key criteria for companies to qualify for subsidies, to promote local manufacturing of new technology products such as electric vehicles (EV) rather than subsidising imports.
“If the government can make it simple, or rather relax certain DVA computation, it will be helpful because it not only delays disbursement of incentives, but also creates confusion,” an tax expert said.
Inverted Duty dilemma
EV manufacturers have been struggling with the issue of inverted duty structure. With EVs attracting a lower GST rate than major inputs, including lithium-ion batteries, they have to claim a refund of the unused input tax credit (ITC). The industry hopes for some positive messaging on this, from Sitharaman.
A quicker refund procedure will ensure that EV manufacturers are not overburdened with unnecessary costs, especially for an industry with high capital requirements.
“There are certain inconsistencies, which makes it a little harder for sometimes the subsidies to reach the right manufacturer or is delayed. The structure and execution is in place but it needs to be further streamlined,” he added.
While EVs attract a GST of 5 per cent, the total price of ownership still remains on the higher side due to initial costs such as battery, as well as low resale value, hence, any reduction on these fronts will also be very beneficial, highlighted analysts.
“The major cost is acquisition/rent of land for installing the charging infrastructure. Hence, if the government can include the land cost as part of the overall charging equipment, then it will obviously give a push to the EV players,” he observed.
