The Finance Ministry has issued couple of notifications providing differential duty structure for motor cars based on the form and manner in which the cars or kits are imported in to India. This change has had a severe impact on the business dynamics and the foreign carmakers in India are working continuously to devise ways and means to arrest this impact at once.
In February 2011, the Finance Ministry defined a completely knocked down (CKD) kit, which was subject to lower duty of 10%, to exclude (i) a kit with a pre-assembled engine or gearbox or transmission mechanism or (ii) a kit where any of these three components were mounted on a chassis. Consequently, imported CKD kits with pre-assembled components became subject to higher basic customs duty (BCD) of 60% . This came as a surprise and was a major cause of concern for foreign car companies in India, who had been adopting the CKD import route quite effectively for few models.
There was stern opposition from the foreign carmakers since they had invested heavily in India for establishing manufacturing/assembly units. The Finance Ministry further revised the BCD as follows:
CKD kits containing all the necessary components, parts or sub-assemblies, for assembling a complete vehicle-
10% BCD when the engine, gearbox and transmission mechanism are not in pre-assembled condition.
30% BCD when the engine, gearbox or transmission mechanism are in pre-assembled form but not mounted on a chassis or a body assembly.
60% BCD if imported in any other form.
While this has provided good relief, foreign carmakers are looking at opportunities to categorise the imports under 10% BCD. This would require stepping up the localisation plans in India including setting up engine manufacturing plants, shifting transmission or gear box assembly in India.
These changes seem to be intended to encourage local manufacturing and value addition in India, resulting in higher investment, employment and economic growth, which is also in sync with the objective of the Automotive Mission Plan (AMP) 2006-16. The AMP also lists 77 items to be put on the negative list (including engines and several components) which would be excluded from any tariff reduction commitments from India.
While localisng assembly of engine/gear box/transmission mechanism is a probable solution, this may not be feasible for all models immediately. The entire business has to be reoriented, new assembly lines and testing facilities need to be set up, technical expertise has to be built, and this requires bulk investment and time. While imports in multiple parts/multiple consignments/ from multiple vendors are possible, these may not be practically or commercially feasible. The carmakers are also exploring other solutions to reduce the duty impact immediately.
It is relevant to note that parts, components and sub-assemblies of cars (not imported in CKD form) attract a lower BCD of 10% or 7.5% . In the context of motor cars, the classification under the Customs Tariff is as (i) motor cars or (ii) parts. Therefore, classification as parts would result in lower duties.
The duty change is indeed significant. The business, logistics and tax teams of the foreign carmakers are now spending all their time devising plans to plug the impact and also to avail the opportunity of 10% BCD on re-categorisation. With strict competitive market conditions, any reduction in duties would greatly boost the bottom line of these companies.
Rajeev Dimri (rajeev.dimri@bmradvisors.com) is partner and leader indirect tax, BMR Advisors and was assisted by Sivarajan.K
