Auto makers seek duty sops to spur exports

The domestic auto industry is demanding a level playing field vis-a-vis imports from cheaper manufacturing destinations such as Thailand, Malaysia and China.

The Society of Indian Automobile Manufacturers (SIAM) has petitioned the government saying embedded taxes octroi, surcharge, turnover tax, electricity duty, works contracts, sales tax on capital goods, natural rubber cess, royalties and cesses applicable on oil, natural gas, iron ore, coal and others, etc throughout the manufacturing chain contribute to as much as 12 per cent of the total cost of manufacturing.

This has been found in an extensive study conducted on behalf of Siam by research firm ICRA recently.

Add to that the higher duties on basic raw material imports, which have not been taken into account while calculating the embedded taxes on manufacturing costs.

For instance, car manufacturing in India has a 7 to 8 per cent cost disadvantage against countries like China due to higher duty on imported steel.

ICRA has found that in Maharashtra, for instance, if the total cost of manufacturing a car is 100, the actual cost is only 87.8.

There is a net impact of inter-state levies of 2.3 per cent; Maharashtra state levies account for 4 per cent; and the impact of central levies is 6 per cent.

If the net impact of embedded taxes is 12.2 per cent, the impact in the case of commercial vehicle and utility vehicle makers is 11.3 per cent. In Tamil Nadu, embedded taxes comprise 12.3 per cent of the cost of a car.

In Maharashtra, set off mechanisms are available only on iron and steel to a certain extent and in Tamil Nadu it is available on aluminium (under the inter-state and import of scheduled goods category and only when finished goods are taxable).

Introduction of value-added tax (VAT) in the future may bring down the impact by a certain level, but there is no consensus among state governments over its implementation and methods.

In fact, the ICRA study found that the net impact could be higher in some states if VAT was introduced in the manner it was currently being discussed.

Therefore, to begin with, the auto industry has asked the directorate general of foreign trade (DGFT) to take these embedded taxes into account, while granting duty drawbacks on exports under the WTO framework.

According to sources in SIAM, the DGFT has set up an internal committee that will look into the matter.

Government sources said the DGFT was almost convinced by the automobile industry's arguments and was working on modalities to extend duty relief under the WTO framework.

The government needs to be sure that the arguments and data being provided by the industry will be legally tenable under the current WTO regulations.

If the DGFT incorporates these embedded costs under the duty drawback scheme, exports from India will become competitive against exports from Asean countries, where automobile makers are being granted sops to make manufacturing cheaper.

However, SIAM sources say that just making exports competitive will not help the local industry, which is seeking the government's support to bring down prices and widen the consumer base.