Investment allowance offers a reprieve

Not all the proposals in the Union Budget 2013-14 spell worry for the Indian automotive sector. In what can be seen as a breather, the Annual Budget 2013-14 has proposed introducing an investment allowance for new high- value investments. A company investing Rs 100 crore or more in plant and machinery during the next two financial years (between April 1, 2013 and March 31, 2015) will be entitled to an investment allowance of 15 percent of the investment. This will be in addition to the current rates of depreciation and is expected to accrue in a spillover benefit, especially for small and medium enterprises (SMEs). Moreover, it is likely to attract new investments and speed up implementation of projects especially as no such deductions prevail at present.

While agreeing that it will boost investments in the sector, R C Bhargava, chairman of Maruti Suzuki, however, says it does not entail a leapfrogging of Maruti’s investment portfolio. Nor will it mean setting up two manufacturing facilities instead of one to increase passenger car volumes. “Maruti’s plan is to increase production of cars from the Gujarat facility and that cannot be doubled just because of an investment allowance.” But he confirms that the allowance reduces the cost of investment, for example, on an investment of Rs 1,000 crore, Rs 150 crore will be the allowance of which Rs 50 crore will be the saving in terms of tax deductible, outflow being taxable. Meanwhile, most automakers have given their tact approval of the investment incentive for installation of new plant and machinery, clubbing it as an additional advantage for serious investors that would go a long way in propping up investment.

“It is an opportune move for the manufacturing sector and has come at a good time,” says R Sethuraman, director (Finance and Corporate Affairs), Hyundai Motor India Ltd. “Investments at HMIL are dictated by market requirements rather than other considerations. We recently announced an investment of $ 300 million (Rs 1,600 crore) in November 2012, at a time when there were no incentives and the auto industry has been facing tough times. It underscores our commitment to stay invested in India.”

Nissan Motor India also expects to benefit from this investment scheme as it plans to expand its operations in India through the launch of 10 new models by 2016 and also step up its dealer network significantly to 300 by 2016. Nissan has already committed an investment of Rs 4,000 crore at its Oragadam plant near Chennai along with its alliance partner Renault over a seven-year term. “We are committed to further expanding our product line-up across different segments,” remarks Sunil Rekhi, CFO, Nissan Motor India.

While welcoming the proposal, Joginder Singh, president and managing director of Ford India, believes that everything should be growth-oriented as India is itself a growth story. The auto industry being a big part of the Indian economy, growth-oriented policies and investor-friendly policies are always beneficial, accruing in benefits not only for Ford but for the general population as it will help raise the standard of living in this country. Meanwhile, Ford is on track with its commitment to invest $ 1.14 billion (Rs 6,000 crore) for the Sanand plant and EcoSport production.

Vishnu Mathur, director general of industry body SIAM, also affirms that the investment allowance looks to be a good move and should revitalise some investments.

However, a number of component manufacturers are of the opinion that since very few companies in their sector invest such large sums of money in one financial year, the benefit of the incentive would be limited for them. Moreover, given the current industry situation, there is not much opportunity to invest in capacity which is already underutilised, feels L Ganesh, chairman, Rane Group.

Another drawback is that manufacturers feel that the incentive should not have been for a limited period and should be extended over a longer timeframe if investments in the manufacturing sector are to be spurred. The Anand Group differs from this point of view, and thinks that this additional incentive will give a fillip to the growth plans of some of its large companies. However, in view of the continuing downturn in the automotive industry, the Group plans to exercise caution in creating large new investments and increasing the portfolio size that will be undertaken in consonance with the plans of its OE customers and the growth in the industry.

Overall, the investment allowance will help restore industry confidence in fresh investments. This, in turn, is expected to spur the Indian economy towards its GDP growth target of 6.9 percent as budgeted for the year 2013-14 and towards 8 percent in 2014-15.

Obviously, the fundamentals of growth in India are still positive and many companies have planned significant investments for the next financial year. For instance, the UNO Minda Group is planning to invest Rs 400-500 crore in the next financial year and N K Minda, CMD, says that there are many projects under various stages of implementation. But he cautions that since this is just a one-time allowance and a one-time benefit, therefore they do not foresee major spin offs from it.

Pep for electronic goods

Further, the Budget proposals also provide incentives to semi-conductor manufacturing including a zero customs duty for plant and machinery to promote the manufacture of electronic goods. The National Electronics Policy 2012 makes a pitch for boosting local production of electronics and semiconductor wafer fabs. This will facilitate a globally competitive electronic system, design and manufacturing sector in the country to achieve a turnover of about $ 400 billion (Rs 22 lakh crore) by 2020 with an investment of about $ 100 billion and generate jobs for around 28 million people. According to Jayant Davar, vice-chairman and MD, Sandhar Technologies, the return on capital expenditure in the component sector has been dropping. So this incentive will make the overall investment more attractive and credible for the shareholders in terms of PAT. “The doubling of surcharge will affect everybody, including Sandhar but the zero customs duties on domestic manufacturing of electronic components is very encouraging for us as we are already working on two electronic products and this will make us more price competitive. The time window for the investment allowance is two years. We wish it was three years,” said Davar.

With vehicles, particularly passenger cars, getting more complex and sophisticated, the use of electronics is also rising. The government is believed to be in advanced discussions with two consortiums for setting up chip fabrication units and an electronics component ecosystem is likely to develop around it. The India Electronics and Semiconductor Association has welcomed the zero percent customs duty for import of equipment for the lab and believes that this will help enhance the viability of the project for the investors.

The Rane Group of Chennai imports some electronic parts for electronic power steering and Ganesh says that they have to wait and see if this initiative boosts domestic manufacturing.

The customs duty levels on the import of many components required for the manufacturing of several electronic products were already very low and in some cases zero for items covered under several Free Trade Agreements entered into by India with other countries. Deepak Chopra, Group CEO of Anand Automotive, says that zero customs duties across- the-board for these components will further encourage local manufacturing of electronic products and a few companies of Anand will also be able to take advantage of this provision.

The proposal is expected to encourage the current business investment scenario in the sector. Tax sops allow better margins in operating profits, thereby enabling the industry to focus on areas of expertise and operations that would enable them to be competitive.

Surcharge to hit profits

The Budget FY’14 also saw the government impose a surcharge on corporate tax and double it from 5 to 10 percent for domestic companies. As a result of this, the outflow of companies is set to be more. For foreign companies, the surcharge will rise from 2 to 5 percent. They will now have to cough up one percent more of their profits as tax and listed companies will have to pay an additional Rs 700 crore as there will be a higher surcharge on dividend distributed that is set to rise from 5 to 10 percent.

Corporates had been demanding lowering of income tax for a long time. Car manufacturers feel that at this juncture, when the industry is facing nipped growth, the increase of the surcharge to 10 percent will have adverse ramifications for them.

Tax outflows

Companies like the Rane Group suspect there will be an impact on tax outflow. For the Anand Group, it will signify an uptick in the effective tax rate by over 1.5 percent for all its companies. However, it is hopeful that the higher surcharge will be levied only in 2013-14, and not be continued beyond. For the UNO-NK Minda Group, the surcharge is expected to impact its bottom-line. Honda Motorcycle & Scooter India, which is setting up its third plant in Karnataka, has already made its first round of investments here. Hence, financial incentives as stipulated under the Budget will impact it only when it undertakes the next stage of ramp-up.