Passenger vehicles duty structure (8702 & 8703)

Small cars
(Upto 4000 mm length and engine size of 1200 cc for petrol and 1500cc for diesel)

24+1

16+1

• Excise duty on all passenger vehicles including MUVs should be 16%.

• Small cars should be defined only on the basis of length. Fuel and engine capacity should not be included in definition.

• SIAM would like to point out that in the Auto Policy 2002, under Excise Duty (Section 9), along with small cars (Sub Section 9.1), MUVs (Sub Section 9.2) were also identified for fiscal incentives.

Two & Three Wheelers and their componentsTwo & Three Wheelers and their components

16+1

• These are vehicles for the mobility of people who can't afford cars and have limited access to public transport facilities

Rate of excise duty for motor vehicles having seating capacity up to 13 persons including driver when registered as maxi-cab (taxi)

24+1

• Vehicles with a seating capacity of 6 +1 registered as taxi are entitled for refund of 8%, the same benefit be extended to maxi-cab (taxi).

Motor vehicles for transport of goods fitted with petrol engine.

24+1

• Charging higher duty on the basis of fuel should not be the rationale / logic. The present anomaly may be removed.

• As such no popular vehicles fall in this category.

Excise duty on Ambulances

24+1
(eligible for refund of 8% SED)

• Manufacturers be allowed to clear the ambulances by paying duty @ 16%. There will not be any need for claiming refund.

• A specific entry for ambulance be introduced in Central Excise Tariff

National Calamity Contingent Duty

1

• Need to abolish NCCD

MRP Based Levy On Automobile Parts And Components: Abatement Rate to be Increased on MRP for Automobile Spare Parts

It is requested that the abatement rate to be increased to 55% for automobile spare parts.

With effect from 01.06.2006, MRP based valuation has been introduced for automobiles parts and spare parts. The present abatement of 33.5% on MRP is allowed for calculation of excise duty. The abatement rate is very low. For example if our MRP is Rs.100/-, then total margin available to trade is Rs. 1.28 only.

It is obvious that actual margin to various intermediaries in distribution channel is much more than 1.28%. As per our estimate it is around 30%.

The abatement rate announced has led to an increase in the effective excise duty payable compared to what it was before. Consequently the whole spare-parts and after sales operation has become unviable, which can be addressed only by significant increase in prices.

Multiple Taxes /levies -Basic Excise Duty, Automobile Cess, NCCD, Education Cess

These multiple levies should be merged into a single rate of Excise Duty.

Multiple levies distort the system. Also, while introducing NCCD, it was initially planned only for one year. Because of this, a manufacturer has to maintain separate accounts. NCCD levy increases the product cost by 1% with multiple tax rates.

Multiple types of excise duty complicate administration and distort the system. One single type of excise duty will make the implementation easier for the Govt., as well as the industry. Any allocation of revenue could be done internally by the govt. by proper legislation.

MUV as Taxi

Refund to be allowed for all Motor vehicles such as MPV and Station wagons (with seating capacity below 10) classified under chapter heading 87.03 when registered as Taxi.

Under Notification 6/2006 dated 1.3.2006, Motor Vehicles classified under Chapter heading 87.03 with a seating capacity of 6+1 person (including driver) when registered for use solely as taxi is entitled for refund of Duty of 8% to the taxi customer. However, the chapter heading 8703, which also includes Motor vehicles with seating capacity above 6 +1 persons is not eligible for refund of 8% duty refund when registered for use solely as Taxi by the taxi customer.

Consequent to above restrictions, a distinction has been made in the tariff denying 8% duty refund to the Motor cars with a seating capacity of over and above 6+1 persons. It may be seen that Taxi segment is growing rapidly and its growth is directly attributed to robust growth of the BPO sector. In fact, Taxi segment contributes considerably to the bourgeoning BPO sector growing vertically with it. Therefore, it is necessary that 8% duty refund should be given for all the vehicles classifiable under chapter heading 87.03 with a seating capacity of below 10 persons.

Incentive for conversion to cleaner technologies/ Alternative Fuel - CNG/ LPG/ Hybrid vehicles and other Alternative Fuel vehicles

In order to promote use of CNG/ LPG/ Hybrid vehicles and other Alternative Fuel vehicles, a clean alternate fuel, in the interest of protecting environment, the excise duty levy on CNG vehicles and the parts and components thereof may be reduced.

Compressed Natural Gas (CNG) / Liquefied Petroleum Gas (LPG) / etc has now been established as a suitable alternative automotive fuel, particularly from the point of view of environmental protection.

In order to gradually increase the usage of such vehicles, the price has to come down significantly. To achieve this, in the over all interest, support from the Govt by way reduced taxes / duties on CNG / LPG / Hybrid vehicles and other Alternative Fuel vehicles and components will be required.

Anomaly in excise rate structure for small vehicle body building

It is suggested that chassis for vehicles with smaller tonnage (up to 1.5 MTs), (falling under 8706) should not attract the extra imposition of Rs. 10,000/-.

Excise duty on the Chassis fitted with Engine was enhanced from 16% adval. To 16% + Rs.10,000/- per unit during the Budget 2003-04 on the basis that the same would promote integrated bus body building, without effecting the duty structure of the fully built vehicles.

The above would be effectuated as under:

1. Either the Bus/Truck manufacturer would manufacture the entire truck or bus inside his factory; or

2. Chassis fitted with Engine would be given to a body builder by the Chassis manufacturer along with the design features and of the fully built vehicles. Over 90% of the vehicles constituted in this category is above the payload of 1.5 MTs capacity. The cost of body building ranges between Rs. 75,000/- and Rs. 5 lacs and above depending on the type of body building. In such cases, since the body builder would avail the entire Cenvat credit of the duty paid on the Chassis (i.e. 16% + Rs.10,000/-); the effective rate of duty on the Body built vehicle would remain at 16%.

In respect of the vehicles with a smaller payload of less than 1.5 MTs, which is normally used as load carriers for short haulage, the cost of body building would be in the range of Rs. 20,000/-. In such cases, if the manufacturer of the vehicle were to give it to a body builder, the amount of Rs. 10,000/- cannot be absorbed under the Cenvat scheme, as the value addition itself is only around Rs. 20,000/-. Consequently, the effective duty would far exceed 16%. It would therefore be iniquitous to impose Rs. 10,000/- on the Chassis of the smaller tonnage (up to 1.5 MTs).

Commercial Vehicles falling under Tariff Heading - 87.02 & 87.04 (other than CKD)

Tariffs for CBUs of commercial vehicles should be de-linked from other tariffs. The applied rates for used vehicles need to be pegged to 40% i.e. the bound rate. Duties should not go below 12.5% slab.

Passenger Cars / MUVs/ Passenger 3-wheelers under Tariff Heading - 87.03 (other than CKD)

Status-quo

Two-Wheelers / Goods Three Wheelers under Tariff Heading - 87.11 (other than CKD)

-do-

Stainless Steel Sheets / Coil - of a width 600mm or more under Tariff Heading - 7219.

Non Alloy Steel rate of duty is already 5%, hence it should be same on Other Steels. It would be preferable if these items could come at zero duty keeping in view certain finished items made out of these inputs are already attract 5% duty.

Stainless Steel Sheets / Coil - of a width less than 600mm under Tariff Heading -7220

-do-

Bars & rods of Stainless steel under Tariff Heading -7222

-do-

Alloy Steel Sheets / Coil - of a width 600mm or more under Tariff Heading - 7225.

-do-

Alloy Steel Sheets / Coil - of a width less than 600mm under Tariff Heading - 7226

-do-

Dies, Moulds, Machineries & Quality Checking Instruments, under Tariff Heading -82, 84, 85 & 90

Improves cost competitiveness in Export of Components & Creates a differential duty structure between Capital Goods & Components (Subjected for 12.5% duty).

Safety Seat Belts, under Tariff Heading -8708.21. Air Bag, Anti Lock Braking System, under Tariff Heading -8708.99.

Safety related items need to be exempt from Customs duty.

Components of Electric and Hybrid Vehicles

List of Components for Electric Vehicles are given at Annexure-I

Project Imports: Heading 98.01 of Customs Tariff Act, 1975 gives the facility of a flat rate of duty for import of diverse machinery, spares and raw material initial charging etc. for setting up a new project or substantial expansion of an existing project ( 25% or more increase in installed capacity).

Ever since a general lowering of machinery rate of duty, this procedure has lost its advantage. On the contrary, there are additional complications of prior registration of the contract, provisional assessment with bond and security and final reconciliation. There is no real advantage to import from Project Imports route. To attract more investment into the country and generate employment, we need to make this route more attractive and cost saving for the New Projects.

Hence project imports rate of duty should be reduced from 10% to 5%. Project import procedure should be simplified. Avoid any CVD which is being proposed or allow CENVAT credit.

Duty Free Import For Research & Development (Automobile Sector): At present, imports of R&D related capital equipment and components are charged at regular customs tariff rates, for Automobile Industries. This pushes up the cost of setting up R&D facility. In order to improve and develop further to catch up with International standards R&D facility is required, for which Duty free imports should be allowed, for import of capital goods and other materials required for R&D.

(Para 2.55 of the Hand Book of Procedures permits duty free import of R & D equipment by Pharmaceuticals and Bio-technology Sector, upto 25% of the FOB Value of exports, during the last financial year).

Items imported for R&D of Automobile sector should be considered at par with R&D of Educational institutions/ Bio-Tech/ pharmaceuticals, and the benefit of Nil rate of duty should be extended.

This will benefit automobile industry to build sound R&D infrastructure to meet the International Standards and also to know, 'Know why' after knowing ' Know how'.

Introduce GST

Need to introduce at the earliest as per the roadmap in consultation with industry to overcome the complexities of taxation system and help enhance competitiveness of manufacturing sector.

The Hon'ble Finance Minister in the last Budget has talked of introduction of GST by 2010.

Need for Abolition of CST.

The Central Sales Tax should be phased out as per the roadmap and the Government to ensure implementation.

The present rate of Central sales Tax is @ 4% against C Form. The introduction of VAT and further introduction of GST as recommended by the Kelkar Committee should pave way for zero rate of CST.

While there has been continuous dialogue on phasing out of CST, no firm commitment has been made by the Govt. so far.

Exempting Central Sales Tax on Components used in Vehicles to be Exported

It is suggested that an appropriate procedure/form etc. should be introduced for exempting goods from levy of CST, which is to be used in manufacture of products to be exported.

The industry is purchasing various components, raw material, etc. for use in manufacturing of vehicles. Quite a large portion of production is being exported.

As per present CST rules any party can purchase any material at NIL CST against Form-H provided that material is exported by him as per prescribed procedure. However, this facility of Form-H is not available to manufacturers for purchasing raw materials/components, etc. for export production.

Basic spirit of all tax laws (like excise duty, sales tax, custom duty, etc.) is that no tax should be levied on goods being exported. However, levy of Sales Tax (CST) on items used in manufacturing of export vehicles is contrary to the basic spirit of keeping export goods exempt from all the taxes.

All states to be brought under VAT.

Set off of Entry Tax / Octroi against VAT output tax liability to be allowed in all the VAT laws.

The introduction of VAT and GST should be able to abolish all other indirect taxes.

Government may announce a firm schedule for adoption of VAT by States which have not yet switched over to VAT

The corporates are today subject to many other indirect taxes viz octroi, entry tax, stamp duties, turnover tax, tax on electricity, tax on transportation.

This will help the cascading effect of duties on goods and would make the prices more competitive. This will also be lines with the Kelkar Committee recommendation.

Weighted Tax Deduction for R&D expenditure:

The benefit to be extended for a further period of ten years in order to continue to encourage the research & development activities and also to enable the companies to compete globally.

The benefit given in 2004-05 should be extended to the entire year.

The Research & Development expenditure incurred on approved in-house research & development facility is entitled to weighted deduction @150% u/s 35 (2AB). At present, this weighted deduction is available in respect of research & development expenditure incurred only up to 31.3.2007.

The Indian companies have to constantly endeavour their research efforts to be able to compete with the foreign companies.

These suggested changes would encourage proper planning for investments for R&D purposes. This would also facilitate DSIR for proper monitoring of the projects.

The benefit of weighted deduction for R&D Expenditure under section 35(2 AB) of Income Tax Act to the Auto Sector has been restricted only to the expenditure incurred on or after 21st September 2004, since the notification to this effect was issued only on 21st September 2004. SIAM requests the Government to allow the industry to avail the R&D benefit under Section 35(2AB) for the full financial year (2004-05) and not restrict it for half year.

Withholding Tax u/s 194I @ 22.44%: The recent amendment in the Finance Bill has introduced a withholding tax on rentals, adversely affecting the cash flow (which has a cost attached to it) for vehicle leasing companies. This is not justified as a lease rental has a capital recovery component and an interest component. Moreover, the vehicles are financed by loans taken from banks and hence the rate of TDS is too high when compared to the income component of the lease rentals.

The withholding tax should be abolished since a significant component withheld is the capital recovery which is not correct as it is not income.

Suppose the lease rental per month works out to be INR 10,000/-, then withholding tax @ 22.44% will be INR 2,244/-.

If we work backwards then the approximate income in the above lease rental should work out to be INR 6,667/-(INR 2,244/33.66%).

But this is not the case as in the above lease rental the interest component is approximately 25% and the rest is capital recovery.

Moreover, since the vehicles are financed by the loan taken from banks, it is the interest margin, which is the actual income which is far less than the interest component itself (an average of 2% of the investment value)

It should be noted that even the skill or knowledge oriented services attract a lower rate of withholding tax @ 5.61%.

Hence, for reasons stated above, withholding tax @ 22.44% on capital intensive leasing industry is not at all justified.

Income Tax: Deduction for car loans

A deduction similar to Housing loan should be granted for the car loans as this will lead to a growth in the passenger car segment and will generate higher revenue to the government in terms of Excise duty and sales tax.

Vehicles (Passenger cars) have become a necessity and are no more a status symbol or luxury goods.

Depreciation Rate on Plant & Machinery to be increased

The present rate of depreciation on the plant and machinery is inadequate for automobile industry.

25% was the rate applicable up to the AY 2005-06. The rate of 25% was originally fixed considering the average economic life of an asset. Hence this should be reinstated.

The rate should be increased to encourage the Automobile Industry.

Motor Vehicle Depreciation rate

15% WDV rate means useful life of 18-19 years for a car, which is totally unrealistic. Income tax should be levied on real income. Hence Depreciation should also be based on real useful life of cars, which is on average not more than 10 years. Hence depreciation rate should be increased to 25%.

Lead time for introduction of proposed changes in Budget: No lead time is given for introduction of new rates/procedures/duties

Any New Levy & Mechanism Should Be Notified Early.
Reasonable time should be provided to assesses for any changes made to any act which brings out a change to the existing rate/procedure/duty etc.

The industry faces stoppage of activities for bringing about any new changes in their systems especially when most of the companies are running on ERP.

Wealth Tax on vacant Industrial Land

Vacant Industrial lands, which are earmarked for future expansion to be exempt from Wealth Tax.

The quantum of investment in automobile sector is sizeable. The land is acquired by the industry keeping in mind future expansion plans. Under such circumstances, new industrial units will have vacant land meant to meet requirements for future expansion. To tax investments made on land, which are not fully utilized and are in vacant condition is a retrograde step. At present holding of Industrial land in vacant is allowed under law only for a period of two years, thereafter such vacant land is subject to wealth Tax. However such a provision is detrimental to auto industries whose investments are in different phases spread over a period of 10-20 years.

Issues in implementation of new tax/rate/change in structure

Either the tax should be kept at a totalled single rate or the imposition/change in any tax structure should be done in consultation with representatives of the software industry like SAP, Oracle, etc.

On introduction of education cess, the industry as well as the customs faced problems in updating the systems immediately. The invoicing at times comes to a grinding halt due to this.

This would mean a smooth transition to the proposed tax structure. Also there should be interim arrangements to tide over immediate implementation of any new tax or cess.

Extension of advance ruling facility for Large Tax payer units under LTU jurisdiction or companies paying more than Rs 5 crore taxes.

Extend advance ruling facility to LTU formation.

While appreciating the move of the Hon. Finance minister towards formation of LTU in the country effective from 1.10.2006, we find it imperative that certain privileges and preferences should be given to the Large tax payers coming under the jurisdiction of the LTU.

It is understood that Central excise and Cenvat rules are amended in order to extend certain preferences and privileges to the LTU formations. However, it is also understood that the LTU policy is not brought into the rule book by legislative changes in the Act. Consequent to introduction of LTU policy by the Government without legislative amendments, it is felt that the true spirit and intention of the Government may not be forthcoming.

For instance, units falling under the jurisdiction of the LTU, as a privileged tax payer would intend the facility of advance ruling in respect of ambiguous issues basically with an intention to avoid forthcoming disputes. In the absence of the provisions of advance ruling under LTU scheme, it cannot be said that tax disputes may not be forthcoming. In fact, advance ruling on critical issues is panaceas for all tax disputes thereby the disputes are totally avoided. Therefore, the advance ruling remedy acts as a dispute avoidance mechanism rather than dispute resolution measure. Accordingly, it is imperative to extend the benefit of advance ruling to the LTU formations.

Industrial Cluster: Automobile -
Kancheepuram Dist:
Many automobile units such as Hyundai, Ford India, Mahindra, Mitsuibishi, etc. along with hundreds of automobile ancillaries have recently been set up at Kancheepuram District of Tamil Nadu. The volume of export from this area alone is more than Rs.3500 crores per annum.

Kancheepuram District of Tamilnadu should be declared as an Industrial Cluster of Automobile, to facilitate development of infrastructure facilities.

Government should declare Kancheepuram District as an Industrial Cluster for automobiles and provide infrastructure facilities of global standards.

This will expedite faster industrial growth in these areas, resulting in more exports from this area.

Encouragement to Investment

1. Tax holiday for Automobile Industry for investment exceeding Rs.500 crore (as given to power projects, firms engaged in exports, EOUs, infrastructure projects, etc.)

2. Deduction of 30 per cent of net (total) income for 10 years for new industrial undertakings.

3. Tax deductions of 100 per cent of export profits.

4. Concession of Import duty on machinery for setting up of new plant or capacity expansion

5. Deduction of 50 per cent on foreign exchange earnings by automotive companies (like Construction companies, hotels, etc.)

In order to spur further growth, the automotive Industry should be brought under the purview of existing incentive structure (which exist for other sectors of the economy or are available in some of the competing countries).

Promotion & Encouragement to Exports

1. Proceed on internal reforms at an accelerated pace by bringing in full country-wide VAT, and at the same time withdrawing all other central and state taxes and levies on manufacturing.

2. Implement a comprehensive GST and reduction of tariffs on raw materials, before further reduction in the automotive tariffs are done. It should be in consultation with industry.

3. Customs duty exemption on import of R&D equipment by 'organisations' amending the scope of current notification from 'company' to 'organisations'

This will expedite faster industrial growth in these areas, resulting in more exports from this area.