The industry expects certainty in the tax and regulatory policies, and their interpretation. While in the recent past, there have been constant efforts from the Government for simplification and rationalization of Indian tax laws, there are still areas which are ambiguous and lead to uncertainties for businesses
The Auto sector in India is going through one of the toughest phases in its history. After a robust performance in 2018-19, it started declining. Those who blamed it on BS-VI regulations and thus expected growth to rebound in April 2020, were in for a rude shock in end March 2020 when COVID-19 hit India. Finally, when things were starting to look up for the auto sector by the third quarter of the FY21, the second wave hit India harder in February – May 2021. This year, when the industry was still warming up to the new PLI incentives announced by the Government in the last month of 2021, there has been a sudden onslaught of the third wave of COVID-19.
The sector which contributes to almost half of the industrial GDP (7.5% of the overall GDP) of India is reeling under tremendous pressure due to the pandemic. If that was not enough, sudden increase in goods consumption during the pandemic as opposed to services consumption (like travel, tourism, entertainment etc. reduced substantially) has resulted in dramatic rise of commodity prices leading to increase in inputs costs for automobiles, increase in logistics and shipping costs. Pandemic has also pushed down the demand for public transport substantially, hitting commercial vehicle sales.
Scarcity of semiconductor chips started hitting the sector in the current fiscal which Scarcity of semiconductor chips started hitting the sector in the current fiscal which forced companies to reduce production even when they had demand. Emergence of EVs and Government’s focus on clean fuel technology created a doubt in the minds of consumers – should I buy my vehicle now or should I wait for a year or two? Inevitable transition to EVs also created pressure on the auto players to make massive capital investments to stay in the race.
A stable and consistent long-term tax policy
With this uncertain present and even future, the industry naturally would expect certainty in the tax and regulatory policies, and their interpretation. While in the recent past, there have been constant efforts from the Government for simplification and rationalization of Indian tax laws, there are still areas which are ambiguous and lead to uncertainties for businesses. Hence, clarity on some of such issues is much needed. For instance, to address the ambiguities in case of cross-border deals, a clear exemption to shareholders in case of foreign mergers involving Indian shares would be much appreciated.
Majority of the players in the industry have suffered a significant dent on profitability on account of Covid and related factors. However, reasons for low profits/losses are invariably attributed to pricing of inter-company transactions, at the time of Transfer Pricing scrutiny without appreciating these external reasons. Specific guidance should be provided by the Government on aspects such as adjustments/relaxation that can be allowed to compute normalized Transfer Pricing margins, right to use of single-year data of comparable companies, allowing economic adjustment on taxpayer’s financial data (being tested) as an alternative/in addition to comparable companies’ financial data and use of Customs/SVB methodology for transfer pricing purposes (and vice-a-versa), with an objective to provide some relief to the sector. The Government may also consider rationalizing the existing safe-harbour margins considerably, to more realistic and acceptable levels.
The scope of Equalisation Levy (EL) provisions was expanded two years back, and these are now very widely worded. There are significant interpretation issues impacting MNCs having operations in India. With the global consensus achieved at the Inclusive Framework, the issuance of beneficial clarifications will provide much needed relief to non-residents doing business with India without affecting India’s negotiating position. Therefore, in Budget 2022, focus should be to ensure a more stable and consistent long term tax policy, in order to make India a favorable destination for investments. Road ahead.
The past year has witnessed multiple initiatives from the Government, which are likely to yield positive results for the sector in the years to come. The production-linked incentives extended for electric vehicles and advanced technology components, the vehicle scrappage policy and recent announcement of PLI scheme for semiconductors are big positive steps and have the potential to rejuvenate demand and resolve supply chain disruptions for the sector. Having said that, a continued government expenditure and a stable tax policy in the upcoming Union Budget can pave the way for revival and growth of the sector.
About the Author
[author title=”” image=”http://”]Rajeev Dimri is National Head of Tax. KPMG in India [/author]
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members.
This article first appeared in the Economic Times