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TOG INSIGHT

Budget amendments in Automobile Sector Thrust to manufacture or import?
By Anupama Ravindran, Adv. & Tax Consultant
Feb 09, 2018

Hon'ble Finance Minister Mr. Arun Jaitley, in his fifth Budget Speech presented on 1st February 2018 stated that he is making a calibrated departure from the last two decades, wherein the trend largely was to reduce the customs duty. He envisages that there is substantial potential for domestic value addition in certain sectors like food processing, auto components etc. To incentivize the domestic value addition and "Make in India" in some sectors, he has proposed an increase in Customs Duty on certain items. The measure is intended for creation of more jobs in the country.

The intention behind the amendments in Customs Duty rates is sincerely appreciated. However, I dwell on whether the changes in the Customs Duties of various goods are compelling enough to fulfil the stated intention.

Prior to the Budget 2018-19, the Basic Customs Duty (BCD) (tariff rate) on Completely Built Units of Commercial Vehicles, that is Buses (Motor Vehicles for the transport of ten or more persons) and Trucks (Motor Vehicles for transport of goods) classified under Chapter Heading 8702 and 8704 respectively, was 40%. BCD on import of Parts and accessories for manufacture of buses and trucks, classifiable under Chapter Heading 8708 was 10%.

Sl. No. 524 (a) of Notification No. 50/2017-Cus dated 30th June, 2017 provides certain preferential duty rates/ exemptions. According to the Notification, "Buses and Trucks of 8702 and 8704, that are imported as Completely Knocked Down (CKD) kits, containing all necessary component parts or sub-assembly, for assembling a Complete Vehicle with engine, gearbox and transmission mechanism not in a pre-assembled condition" attracted a basic customs duty of 10%.

The same Notification, vide clause (b) provided that "Buses and Trucks of 8702 and 8704 that are imported as Completely Knocked Down (CKD) kits, in any form other than as stated above" attracted a basic customs duty of 20%.

To sum up, prior to the budget, if an importer, being a Vehicle Manufacturer,wished to import parts then the applicable BCD was 10% in terms of the customs tariff rate.

Alternatively, if he imported CKD kits, the applicable BCD under said Notification would be 10%.On the other hand if he imported CBUs, the applicable BCD would be 20%, as provided by exemption notification.

As discussed above, budget 2018-19 brought about changes in the BCD as follows. Budget changes and Exemption Notification No. 6/2018-Cus dated 02-02-2018 amended Sl. No. 524 of Notification 50/2017-Cus. According to the amendment, BCD on Import of CKD kits of buses and trucks was increased to 15% from the earlier 10%. BCD on Import of CBUs of buses and trucks was increased to 25% from 20%. Import of parts and accessories of motor vehicles was increased to 15% from earlier 10%.

There is another entry in the Customs Tariff, the rate of which has remained unchanged even after the budget. CTH 8706 covers Chassis fitted with engines, for motor vehicles of headings 8701 to 8705. The heading can include Chassis fitted with engine, transmission and steering gear and axles. That is to say, goods of this heading are vehicles without bodies. The entire CTH 8706 is subject to a BCD of 10% both prior to budget and post Budget 2018-19.

Now coming to the paradox. A chassis pre-fitted with engine, transmission, steering gear, etc., is importable at 10% basic customs duty. Whereas, import of parts and accessories for manufacture of buses and trucks, and CKD Kits of Buses and trucks is subject to 15%. Prima facie, import of a Chassis pre-fitted with engine is more attractive and attracts less basic customs duty. Then, potentially a manufacturer will set up, in India, only the body building workshop.

Any person familiar with the automobile industry will know that the cost of putting up an automobile manufacturing plant is very capital intense exercise. Unless a Chassis fitted with engine, transmission, steering, etc. is substantially more expensive than a CKD import or import of parts, my feeling is people will not opt to set up plants for manufacture.They would rather import chassis and build body in India. So, unless the industry is incentivized by way of prudent tax rates, industry may not rush to set up a plant in India. Therefore, it is time to take prudent decision as to whether the plant should be set up for manufacture from part level or to import chassis and only build body in India.

Then, unfortunately, our starting point, the objective of increasing domestic value addition may remain unachieved. Hoping Hon'ble FM kindly makes note and brings down BCD on parts, accessories, and CKDs.

(The views expressed are strictly personal.)