Automobile Industry - Some Economic Policies

Economic Affairs:-

In this section we are giving the latest information on various economics and commercial aspects
governing the Indian Automobile Sector.

In the first section we have given the Auto Policies of Government of India to facilitate sustainable
development of Indian Automobile industry.

In the second section we have given the current rates of major duties and taxes applicable to vehicles in
India. Excise Duty is essentially a manufacturing tax imposed on all vehicles manufactured in India. The
same rate is applicable to imported vehicles in the form of Counter Vailing Duty (CVD). Custom Duty is
essentially an import duty applicable on all imports.

VAT has recently replaced Local Sales Tax in India. However, VAT has not yet been adopted by all
states in India.

In the next sub-section we have given the SIAM activities related to Union Budget. We have given the
SIAM Pre-Budget Memorandum, which was submitted to Ministry of Finance before the Union Budget
and is essentially a compilation of SIAM suggestions for changes in policy and procedure issues related
to the Budget. We have also given the Union Budget highlights which are related to the Automotive
Sector.

Finally, in the Trade Policies section we have given write-ups on India’s engagements in various Trade
Negotiations, Indian Preferential Trade agreements and NAMA negotiations in WTO and Indian
Automobile Industry.

The last section on other issues covers the latest available information of India’s Trade.

Suggestions for VAT Implementation :-

1. VAT in all States

VAT system of taxation required to be implemented simultaneously throughout the country in all
States and Union Territories at the same time. This will avoid serious market distortions and
enhances industry's competitiveness.

2. Uniform VAT Law and procedure

India has often been described as a country with large market. But unfortunately this large market
has been highly fragmented by inter-state barriers. It is further complicated by State specific law on
sale of goods. The wide divergence in the structure and practice has hampered free flow of goods
and services within the country and effected competitiveness of Indian Industry.
 Homogeneity is the essence of VAT and all States should come together to accept a common law
under VAT. All forms, returns & declarations should be common to avoid artificial barriers and
complexities.

3. State VAT Rate and Classification of goods

Uniform rate structure across the country helps in avoiding diversion of trade from one State to
another, checks unhealthy competition and reduces tax evasion. It helps automobile industry to plan
and commit long term investments.

Basic rationale needs to be developed for generation of revenue from industrial products. This should be
long term and the share of taxation in the total value of the ultimate customer needs to be defined. SIAM
recommends such a policy in taxing goods and services under VAT.

Total taxes from both Centre and State as proposed by SIAM not to exceed 25%. Considering Cenvat at
16%, Designated rate should not exceed 9%.

The classification of goods should be aligned to central taxes to reduce litigation. Uniform classification
across all States and central taxes would create favourable environment for growth of industry. No
separate classification of Capital Goods

4. Multiple levies and Industrial input

One of the stated objectives of VAT is to reduce multiple levies. Number of rates under VAT should
be 0%, 4% & RNR in addition to 1% on precious metal and 20% on petroleum products. All other
levies like Octroi, Entry Tax should be abolished.
Inputs used in the manufacturing should be taxed at 4% against issue of declaration. There should
not be any specific list of industrial input, as it will deprive the benefit to the industry using input other
than the one mentioned in the list. Reduced rate on industrial input will avoid refund problem and
avoid unnecessary interaction with the Department.
Further when interstate transactions are zero rated, manufacturer selling predominantly in interstate
ends up having huge input tax credit without set-off. Automobile manufacturers having one
manufacturing facility in the country sells more than 80% of the production outside the Sate and
forced to seek refund from the State Government for excess input tax credit. SIAM suggests VAT
rate of 4% on all industrial input to mitigate the refund issue.

5. Set-off mechanism
Set-off of tax paid should be allowed for all inputs including raw material, components, consumables,
fuel and capital goods. Tax paid on services should be allowed to be set-off. Tax paid on capital
goods should be allowed as set-off in full in the same year to avoid confusion and litigation later.

6. Interstate transactions
All interstate transactions should be at zero rate.
Further automobile manufacturers 'Stock Transfer' goods by setting up huge facilities to strengthen
distribution net work in order to reach the product to the customer at the earliest and at least cost.
This mechanism should not be affected even under VAT.
7. Sales Tax Incentives
 Automobile manufacturers have made huge investments, which are in phases in unviable locations.
These locational disadvantages are partially offset by fiscal incentives. Any detrimental variations or
withdrawal will affect the viability of such investments. This may adversely impact the country's image
as an attractive investment destination. It is heartening to note that all States have agreed in principle
to honour all existing incentives under VAT

8. Refunds
Due to various reasons there is no alternative but to seek refund from the Government in case of
excess credit. Given the state of finances, refunds will be difficult and uncertain while locking up
working capital for industry.
Refunds should be honoured within 15 days from the date of filing returns and credited to the
assessee's account.
Alternatively, VAT Entitlement Certificate on the lines of freely tradable DEPB may be considered.

9. Industry Representation
Empowered Committee may consider inducting industry representation in the committee for
transparency and smooth introduction of VAT.

Fuel Economy
Fuel Specification:-

The Fuel Quality plays a very important role in meeting the stringent emission regulation.

The fuel specifications of Gasoline and Diesel have been aligned with the Corresponding European Fuel
Specifications for meeting the Euro II, Euro III and Euro IV emission norms.

The use of alternative fuels has been promoted in India both for energy security and emission reduction
Delhi and Mumbai have more than 100,000 commercial vehicles running on CNG fuel. Delhi has the
largest number of CNG commercial vehicles running any where in the World. India is planning to
introduce Biodiesel, Ethanol Gasoline blends in a phased manner and has drawn up a road map for the
same. The Indian auto Industry is working with the authorities to facilitate for introduction of the
alternative fuels. India has also setup a task force for preparing the Hydrogen road map. The use of LPG
has also been introduced as an auto fuel and the oil industry has drawn up plans for setting up of Auto
LPG dispensing station in major cities

Fuel Specification
The Fuel Quality plays a very important role in meeting the stringent emission regulation.

The fuel specifications of Gasoline and Diesel have been aligned with the Corresponding European Fuel
Specifications for meeting the Euro II, Euro III and Euro IV emission norms.
The use of alternative fuels has been promoted in India both for energy security and emission reduction
Delhi and Mumbai have more than 100,000 commercial vehicles running on CNG fuel. Delhi has the
largest number of CNG commercial vehicles running any where in the World. India is planning to
introduce Biodiesel, Ethanol Gasoline blends in a phased manner and has drawn up a road map for the
same. The Indian auto Industry is working with the authorities to facilitate for introduction of the
alternative fuels. India has also setup a task force for preparing the Hydrogen road map. The use of LPG
has also been introduced as an auto fuel and the oil industry has drawn up plans for setting up of Auto
LPG dispensing station in major cities.

Technical Regulations
Technical

The Indian Auto Industry is harmonizing both Safety & Emission regulations with International Standards
for sustained growth of the Industry for combating the environment and become a global export hub.

India has a well established and Regulatory Framework under the Ministry of Shipping, Road Transport
and Highways in which SIAM plays a very important role. All the stake holders are part of the regulation
formulation setup. The ministry issues the notifications under the Central Motor Vehicle Rules and Motor
Vehicles Act.

India is harmonizing its Emission Norms for Four Wheelers with the European Regulation and has
adopted Euro III, equivalent norms in 11 Metropolitan Cities from Apr 1 2005. For Two Wheelers, which
constitutes 70% of the vehicle population unique Indian emission norms, which are one of the tightest in
the world have been adopted.

The Safety Regulations are being aligned with the ECE regulation and the Road Map prepared by SIAM
envisages alignment by 2010.

The In use Vehicle Emission norms have been tightened with effect from 1st October 2004 and
computerisation model has been developed by SIAM, which is already in place in the Major Metro Cities
and would be extended through out the country in a phased manner.

The Lambda Measurement is proposed to be introduced in the city of Delhi for vehicles with close loop
three way catalytic Converter.

India has joined as an observer in the UNECE-WP29 as an observer and is actively participating in the
deliberation for evolving. GTR's which would help in harmonization of standards.