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Tax incentive for new firms could spark ‘make in India’ for EV parts
4 min read.Updated: 23 Sep 2019, 12:53 AM ISTAmit Panday
The govt’s steps are likely to boost local production of Li-ion batteries, charging equipment and other parts
The FM said new manufacturing companies set up on or after 1 October will pay income tax at the rate of 15%
India’s fledgling electric vehicle (EV) industry is likely to receive a shot in the arm with the slashing of corporate tax on new manufacturing companies.
With most makers of electric vehicles and their components planning their investments for India, they would be encouraged to accelerate their plans for local manufacturing with the announcements made by finance minister Nirmala Sitharaman. The steps are expected to propel domestic production, specifically in producing lithium-ion batteries, charging equipment, electrical and electronic parts. Producers of hybrids and even conventional internal combustion vehicles will also benefit.
“With falling rupee, imports have become expensive. Logically, the manufacturing companies will look at increasing localization of components in India under the newly announced tax regime for new units. This will boost overall manufacturing activities," said Vinnie Mehta, director general of Automotive Component Manufacturers Association of India (Acma).
The auto industry, along with its vast auto ancillary supply chain, accounts for 49% of India’s manufacturing GDP.
Sitharaman announced that new manufacturing companies set up on or after 1 October will pay income tax at the rate of 15%. The benefit will be available to companies which do not avail any other incentive and commence production on or before 31 March 2023. The effective tax rate for these companies will be 17.01% inclusive of surcharge and cess. Also, such companies will not be required to pay minimum alternate tax.
A rush of new manufacturing companies linked to the EV sector will bolster the Modi administration’s efforts to grow EV sales by making them more affordable and also cut costly crude oil imports as well as high levels of pollution in most major cities.
Earlier, the Union government had allotted ₹10,000 crore to accelerate EV adoption in India under the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India, or FAME 2, scheme.
For now, most of the critical electrical and electronic parts for vehicles made in India continue to be imported.
“Maruti Suzuki cars have about 90% localized content, given that some key electronic components are still imported. But we want to make in India. If anybody can make key electronic components in India with quality and reliability, it will help not only your company but the entire Indian automobile industry," Kenichi Ayukawa, managing director and CEO of Maruti Suzuki India Ltd, said at a gathering of suppliers at Acma’s annual session in New Delhi on 6 September.
“This could help attract investment in a few select sunrise industries around lithium-ion batteries, charging equipment and power electronics. There are quite a few global players who are evaluating manufacturing in India and this decision should help in building a stronger business case," said Rajeev Singh, partner at Deloitte Touche Tohmatsu India Llp.
Ashish Modani, vice president of Icra Ltd, said: “Since the electronic content per car is growing every year, new tax concessions may drive localization in electronic components for automobiles. But certain parts like airbags, sensors, inflators and others may continue to be imported."
The latest steps by Sitharaman will complement the decisions announced in her maiden budget presented in July. The finance minister offered income tax rebates of up to ₹1.5 lakh to customers on interest paid on loans to buy electric vehicles, with a total exemption benefit of ₹2.5 lakh over the entire loan period. The minister also announced customs duty exemption on lithium-ion cells, which will help lower the cost of lithium-ion batteries in India as they are not produced locally. Makers of components such as solar electric charging infrastructure and lithium storage batteries and other components will be offered investment-linked income tax exemptions under Section 35AD of the Income Tax Act, and other indirect tax benefits.
Vinodkumar Ramachandran, India head of industrial and automotive sectors at KPMG Advisory Services Pvt. Ltd, said tax concessions for new manufacturing units will be an encouragement.
“There are lot of new technology areas and need new companies to set up greenfield investments," he said, warning that tax incentives alone may not help. “End driver will be the demand for EVs and new automotive component technologies," he said. “As of now, investment appetite is quite low given the slowdown. Most auto component companies are in cash conservation mode to manage their liquidity. They will need a strong revival of overall segment to lead to fresh investments. I think already significant investments are on hold due to the poor demand situation."
On a possible push by automakers to revive overall weak demand in India, Chirag Jain, an analyst at SBICAP Securities, suggested that the government’s initiatives will boost earnings by 3-8%, as most auto companies pay taxes in the range of 28-34% currently.
“However, in the current weak demand environment, together with high channel inventory ahead of BS VI (Bharat Stage VI) transition, we believe OEMs (original equipment manufacturers) will likely pass on these benefits to revive demand through higher discounts to customers, which otherwise would have come largely at the cost of margins," said Jain.