Indian Automobile Industry SWOT Analysis Strengths

Domestic Market is large Government provides monetary assistance for manufacturing units Reduced Labor cost

Weaknesses

Infrastructural setbacks Low productivity Too many taxes levied by government increase the cost of production Low investments in Research and Development

Opportunities

Reduction in Excise duty Rural demand is rising Income level is at a constant increase Threats
o o o

Increasing rates of interest Too much competition Rising cost of raw materials (Number of Vehicles) 2004- 2005- 2006-07 2007-08 2008-09 2009-10 2010-11 05 06 1,209,8 1,309,3 1,545,22 1,777,58 1,838,59 2,357,41 2,987,29 76 00 3 3 3 1 6 353,70 391,08 519,982 549,006 416,870 567,556 752,735 3 3 Automobile Production Trends

Category

Passenge r Vehicles Commerc ial Vehicles Three 374,44 434,42 556,126 500,660 497,020 619,194 799,553

Wheelers 5 3 Two 6,529,8 7,608,6 8,466,66 8,026,68 8,419,79 10,512,9 13,376,4 Wheelers 29 97 6 1 2 03 51 Grand 8,467, 9,743, 11,087, 10,853, 11,172, 14,057, 17,916, Total 853 503 997 930 275 064 035
GROSS TUNROVER OF THE AUTOMOBILE INDUSTRY IN INDIA

Year 2004-05 2005-06 2006-07 2007-08 2008-09

(IN USD MILLION)

20,896 27,011 34,285 36,612 38,238

Conversion Rate Rs.40 = 1USD

Domestic Market Share for 2010-11 Passenger Vehicles Commercial Vehicles Three Wheelers Two Wheelers 16.25 4.36 3.39 76.00

SIAM EXIM Policy Suggestions 1. Credit of embedded tax SIAM had got a study done through ICRA Advisory Services to estimate the cascading impact of embedded tax in manufacturing vehicles in India for which no set-off is available under any scheme. ICRA looked at two states, Maharashtra and Tamil Nadu, which have automotive hubs and had estimated in July 2003 that the quantum of embedded tax amounts to around 12% of manufacturing cost. Since this makes our vehicles less competitive by 12% in the international markets, SIAM suggests that any export incentive scheme offered to the exporters should factor this in the total value of credit. This should be in addition to the Drawback/DEPB for actual import duty suffered on raw material and component. DEPB Scheme should be extended for at least two years till the internal reforms are done. 2. Drawback for 2% education CESS should be admissible for claim Presently the import duty structure is as under a) Basic Custom Duty

b) CVD in lieu of Excise Duty + 2% CESS on CVD c) 2% CESS on total Duty (a+b) CVD and 2% CESS on all imported items are refunded as CENVAT credit. When the imported input is used for export production, basic duty is refunded as drawback. However, 2% CESS on total Duty remains non-CENVATable / refundable. Since all duties on inputs stage are neutralised by way of drawback and or under licence route, the 2% CESS on total duty should also be refunded as drawback. 3. Brand Rate Fixation Effective from 1st April 2003 - the authority for fixation of drawback delegated to jurisdictional central excise authorities. The central excise authorities are raising several points while verifying the data/fixing the brand rate. Further all the rules concerning to fixation of brand rates are formulated by the drawback department, Ministry of Finance. For any clarification on these issues the central excise has to refer the matter again to the Ministry. There are problems which the Exporters are facing with the Central Excise Authorities - which is causing delay in fixation of brand rate. It is suggested that the choice should be given to the exporter to get the brand rate settled from Ministry of Finance as was earlier done under Simplified Drawback Scheme. 4. Export Obligations under EPCG Scheme Past exports average performance without EPCG licence should not be counted for imposing obligation on new EPCG licences. 5. Export under bond to Nepal & Bhutan

Currently the customs authorities do not entertain any refund of duty on exported to Nepal and Bhutan if the payment is other than Letter of Credit (L/C). Payment terms such as TT / cheque, DD or Bank Guarantee may be allowed as applicable for export to other countries. 6. Despatch of Documents to overseas parties Currently despatch of documents to overseas parties is allowed only through banks. This is a time consuming process and entail handling charges. Wherever the payment is coming in advance the exporter be allowed to send documents directly to the party instead of routing through the banks. 7. Rejected material sent back to shipper by importer of repute Customs should not insist on physical verification of rejected material sent back by importer of repute, under section 74 of Customs Act. Customs may verify the export shipment with the incoming new import shipment for ensuring that the part being sent back is identical with the imported part. e.g. 100 pcs of Part A were imported by importer of repute and cleared from the Customs. When parts were examined at the factory it was found that 90 pcs of Part A are acceptable and 10 pcs of Part A are rejected. Importer of repute will instruct the shipper to send replacement of 10 pcs of Part A on free of charge basis. On getting free replacement, importer of repute will process the documents under section 74 for these rejected 10 pcs of Part A for sending it to the shipper. At the time of export examination, to verify the physical identification of the material, Customs should examine the new import consignment of importer arriving at port/airport for Part A. On getting convinced that Part A being sent back is identical with the new imported Part A

(except that earlier was rejected on quality ground), customs should allow clearance of the export shipment under Section 74 and should process the refund of duty. 8. Simplification of Notifications Notifications issued by Departments should be minimum & user friendly. From the subject itself the user should get the theme of the notifications. 9. Interest on duty foregone under duty exemption schemes The Exim Policy provides import of Capital Goods, raw materials, components, consumables etc. either under concessional duty rate or at zero duty for carrying out manufacturing activities with time bound export obligations. Due to some unavoidable changed circumstances, if the importer is not able to fulfill the obligation, then importer needs to regularise the imports on payment of duty + interest @ 15% p.a. Under the prevailing market conditions, the ruling interest rate is in the range of 6% to 8% p.a for all types of transactions. To reduce the burden and to bring down the transaction cost, the interest rate for regularisation of imports need to be plugged max. @ 10% p.a. Exporters who undertake the business risks can survive during uncertainties. 10. Self Assessment for Imports Excise and Sales tax rules provide opportunity to the assessee to assess the duty and pay to the government periodically. Only audit check is done on post payment activities. Government need to come out with such self assessment schemes which will enable importer to move the goods from the ports on arrival and pay duty on self assessment basis. Customs can introduce Audit checks to check adequacy similar to excise and sales tax.

The above will help better utilization of scarce and expensive port facility and reduce the transaction costs. The facility needs to be extended for import clearances also. Indian Port Authorities to look up global standard of operations and eliminate multiple handling and improving the port productivity levels. 11. Export benefits like DEPB /DGFC / Advance License The above export incentives are admitted only for exports against Hard Currency and denied for Rupee trade. As a result Rupee trade with neighbouring countries are less attractive and as a result full potential is not realised. This also affects our competitiveness vis-vis other countries in these markets. The above export Incentives need to cover export under rupee trade also, especially with SAFTA being negotiated currently. 12. Tools Imported For Specific Activity Calibration equipments and tools brought by Overseas technicians / specialists for erection, commissioning and serving of equipments supplied , imports made on re-export basis is liable for Customs duty. At present the provision is to pay customs duty and claim duty draw back under Section 74. The process is cumbersome and takes long lead time. Needs provision to custom clear against bond an cancellation after re-export Imports in advance or as baggage be permitted without duty on condition of re-export. 13. Advanced Technology Has Demerits Imports under CTH 49.11 attracts Nil duty if imported in Hard copy form. However, if the same is imported in the form of CD, Customs duty is applicable. The anomaly needs to be removed Manuals, drawings et covered under scope of CTH 49.11 if imported in CD ROM, customs duty to be exempted

14. Duty Free Credit Entitlement Licence Licensing authorities are issuing DFCE licence for service providers served from India as per para 3.6.4.1 of Foreign Trade Policy 2004-09, which is cover under Customs Notification 54/2003-cus dated 01-042003. Whereas the Licensing authorities are not issuing DFCE Licence for Status Holders (Manufacturer & Exporters), which is covered under customs notification 53/2003-cus dated 01-04-2003. Even if they have issued, the licence is not operative, for the reason that Customs are insisting that the Licence should read as "DFCE issued for Status Holder", whereas it is mentioned as "Service Provider served from India Scheme". Advance Income tax has been paid (approx. 36%) for this accrued export benefit-DFCE Licence, whereas it is not operational. The last date for submission of DFCE application for Status Holder has been extended to 31-03-2005 from 31-12-2004 as per Policy circular No. 12/2004-09 dated 28-12-2004, which shows the intention of Licensing authority for issuing DFCE Licence for Status Holders Suggestion: 1. The licensing authority should consider Manufacturer Exporters (Status Holder) at par with Service providers served from India, and issue DFCE Licence, as stated in Exim Policy 2002-2007. For the Licenses already issued, the amendment as required by Customs "DFCE issued for Status Holder" may please be incorporated in the Licence, so that it can be made operational. 2. Customs Notification 53/20036 dated 1-4-2003 may be amended permitting the Status Holder to pay CVD at the time of Import, so as to enable them to avail Cenvat Credit, as in the case of DEPB Licence amended as per Cus. Notfn. 96/2004 dated 17-09-2004 (para v & vi).

Under Para 3.7.7 of Foreign Trade Policy, for the Target Plus Scheme, "the CVD Paid in Cash or through debit under the said licence, shall be adjusted as CENVAT Credit or Duty Drawback as per rules framed by Dept. of Revenue." 15. TARGET PLUS Scheme Even though Target Plus Scheme is announced in the Foreign Trade Policy 2004-09 on 31-08-2004, the Application form - Appendix 17D is yet to be provided by the Licensing Authority. Dept of Revenue is required to issue Customs Notification for the same, with a provision that CVD paid by cash at the time of importation, by the Status Holder is eligible for CENVAT Credit as mentioned in the Foreign Trade Policy Para 3.7.7. 16. Conditions of Import of Vehicles The existing conditions of import of new and used vehicles should be retained as such. AUTO POLICY OF GOVERNMENT OF INDIA VISION TO ESTABLISH A GLOBALLY COMPETITIVE AUTOMOTIVE INDUSTRY IN INDIA AND TO DOUBLE ITS CONTRIBUTION TO THE ECONOMY BY 2010 1. POLICY OBJECTIVES This policy aims to promote integrated, phased, enduring and selfsustained growth of the Indian automotive industry. The objectives are to:

Exalt the sector as a lever of industrial growth and employment and to achieve a high degree of value addition in the country. Promote a globally competitive automotive industry and emerge as a global source for auto components.

Establish an international hub for manufacturing small, affordable passenger cars and a key center for manufacturing Tractors and Two-wheelers in the world. Ensure a balanced transition to open trade at a minimal risk to the Indian economy and local industry. Conduce incessant modernization of the industry and facilitate indigenous design, research and development. Steer India's software industry into automotive technology. Assist development of vehicles propelled by alternate energy sources. Development of domestic safety and environmental standards at par with international standards.

SIAM welcomed the announcement of Auto Policy, and feels that the policy would serve as a reference document for all stake holders and other interested parties. The Auto Policy has spelt out the direction of growth for the auto sector in India and addresses most concerns of the automobile sector, including

Promotion of R&D in the automotive sector to ensure continuous technology upgradation, building better designing capacities to remain competitive. Impetus to Alternative Fuel Vehicles through appropriate long term fiscal structure to facilitate their acceptance. Emphasis on low emission fuel auto technologies and availability of appropriate auto fuels and encouragement to construction of safer bus/truck bodies subjecting unorganised sector also to 16% excise duty on body building activity as in case of OEMs

The policy has rightly recognised the need for modernising the parc profile of vehicles to arrest degradation of air quality. The terminal life policy for commercial vehicles and move toward international taxing policies linked to age of vehicles, are steps in the right direction.

SIAM has always been advocating encouragement of value addition within the country against mere trading activity. However, this aspect has not been fully addressed. The Auto Policy allows automatic approval for foreign equity investment upto 100% in the automotive sector and does not lay down any minimum investment criteria. The recommendation of promoting passenger cars of length upto 3.8 meters through excise benefits is not in line with the free market concept and may lead to market distortion. However, with the Auto Policy in place, the automotive industry would get further fillip to become vibrant and globally competitive. The industry would get the required support from other Ministries and departments of Government of India in achieving the goals laid down in the auto policy. Home>>Economic Affairs>>Duties & Taxes>>Custom Duty

Heading No

Sub Descrip Rate of duty Headin tion of g No article (1) (2) (3) 87.01 Tractors (other than tractors of heading No. 87.09) 8701.1 Pedestrian controlled tractors 0 8701.2 Road tractors for semi-trailers 0 8701.3 Track-laying tractors 0 8101.9 Other 0 87.02 Motor vehicles for the transport of ten or more persons, including the driver 8702.1 With compression-ignition internal 0 combustion piston engine (diesel or semidiesel) 8702.9 Other 0

(4) 10% 10% 10% 10%

10% 10%

87.03*

Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading No. 87.02), including station wagons and racing cars Vehicles specially designed for travelling on snow; golf cars and similar vehicles 8703.1 Other vehicles, with spark-ignition internal 100 0 combustion reciprocating pistons engine % 8703.2 Of a cylinder capacity not exceeding 1,000 cc 100 1 % 8703.2 Of a cylinder capacity exceeding 1,000 cc but 100 2 not exceeding 1,500 cc % 8703.2 Of a cylinder capacity exceeding 1,500cc but 100 3 not exceeding 3,000 cc % 8703.2 Of a cylinder capacity exceeding 3,000 cc 100 4 % Other vehicles, with compression-ignition internal combustion piston engine (diesel or semi-diesel) 8703.3 Of a cylinder capaity not exceeding 1,500 cc 100 1 % 8703.3 Of a cylinder capaity exceeding 1,500 cc but not 100 2 exceeding 2,500 cc % 8703.3 Of a cylinder capacity exceeding 2,500 cc 100 3 % 8703.9 Other 100 0 % 87.04 Motor vehicles for the transport of goods 8704.1 Dumper designed for off-highway use 10% 0 Other, with compression-ignition internal 10% combustion piston engine (diesel or semi diesel) 8704.2 g.v. w not exceeding 5 tonnes 10% 1 8704.2 g.v. w exceeding 5 tonnes but not exceeding 20 10% 2 tonnes 8704.2 g.v.w exceeding 20 tonnes 10% 3 Other, with spark-ignition internal combustion pistons engine: 8704.3 g.v.w not exceeding 5 tonnes 10% 1 8704.3 g.v.w exceeding 5 tonnes 10%

87.05

87.06 87.07

87.08

2 8704.9 other 10% 0 Special purpose motor vehicles, other than those principally designed for the transport of persons or goods (for example, breakdown lorries, crane lorries, fire fighting vehicles, concrete-mixer lorries, road sweeper lorries, spraying lorries, mobile workshops, mobile radiological units) 8705.1 Crane lorries 10% 0 8705.2 Mobile drilling derricks 10% 0 8705.3 Fire fighting vehicles 10% 0 8705.4 Concrete-mixer lorries 10% 0 8705.9 Other 10% 0 8706. Chassis fitted with engines, for the motor 10% 00 vehicles of heading Nos. 87.01 to 87.05 Bodies (including cabs), for the motor vehicles of heading Nos 87.01 to 87.05 8707.1 For the vehicles of heading No. 87.03 10% 0 8707.9 Other 10% 0 Parts and accessories of the motor vehicles of heading Nos 87.01 to 87.05 8708.1 Bumpers and parts thereof 10% 0 Other parts and accessories of bodies (including cabs): 8708.2 Safety seat belts 10% 1 8708.2 Other 10% 9 Brakes and servo-brakes and parts thereof 8708.3 Mounted brake linings 10% 1 8708.3 Other 10% 9 8708.4 Gear boxes 10%

0 8708.5 0 8708.6 0 8708.7 0 8708.8 0

Drives axles with differential, whether or not provided with other transmission components Non-Driving axles and parts thereof

10% 10%

Road wheels and parts and accessories thereof 10% Suspension shock-absorbers 10%

Other parts and accessories 8708.9 Radiators 1 8708.9 Silencers and exhaust pipes 2 8708.9 Clutches and parts thereof 3 8708.9 Steering wheels, steering columns and steering 4 boxes 8708.9 Other 9 87.09 Works trucks, self-propelled, not fitted with lifting or handling equipment, of the type used in factories, warehouses, dock areas or airports for short distance transport of goods; tractors of the type used on railway station platforms; parts of the foregoing vehicles

10% 10% 10% 10% 10%

Vehicles : 8709.1 Electrical 10% 1 8709.1 Other 10% 9 8709.9 Parts 10% 0 87.10 8710.0 Tanks and other armoured fighting Free 0 vehicles, motorised, whether or not fitted with weapons, and parts of such vehicles 87.11* Motorcycles (including mopeds) and cycles fitted with an auxiliary motor, with or without side-cars; side- cars 8711.1 With reciprocating internal combustion pistons 100 0 engine of a cylinder capacity not exceeding 50 % cc 8711.2 With reciprocating internal combustion piston 100

0 8711.3 0 8711.4 0

8711.5 100 0 % 8711.9 100 0 % 87.12 8712.0 Bicycles and other cycles (including 10% 0 delivery tricycles), not motorised 87.13 Invalid carriage, whether or not motorised or otherwise mechanically propelled 8713.1 Not mechanically propelled 10% 0 8713.9 Other 10% 0 87.14 Parts and accessories of vehicles of heading Nos. 87.11 to 87.13 Of motorcycles (including mopeds) 8714.1 Saddles 10% 1 8714.1 Other 10% 9 8714.2 Of invalid carriages 10% 0 Other : 8714.9 Frames and forks, and parts thereof 10% 1 8714.9 Wheel rims and spokes 10% 2 8714.9 Hubs, other than coaster braking hubs and hub 10% 3 brakes, and free-wheel sprocket wheels 8714.9 Brakes, including coaster braking hubs and hubs 10% 4 brakes, and parts thereof 8714.9 Saddles 10% 5 8714.9 Pedals and crank-gear, and parts thereof 10% 6 8714.9 Other 10% 9 87.15 8715.0 Baby carriages and parts thereof 10% 0

engine of a cylinder capacity exceeding 50 cc but not exceeding 250 cc With reciprocating internal combustion piston engine of a cylinder capacity exceeding 250 cc but not exceeding 500 cc With reciprocating internal combustion piston engine of a cylinder capacity exceeding 500 cc but not exceeding 800 cc With reciprocating internal combustion piston engine of a cylinder capacity exceeding 800 cc Other

% 100 % 100 %

87.16

Trailers and semi-trailers; other vehicles, not mechanically propelled; parts thereof 8716.1 Trailers and semi-trailers of the caravan type, 10% 0 for housing or camping 8716.2 Self-loading or self-unloading trailers and semi- 10% 0 trailers for agricultural purposes Other trailers and semi-trailers for the transport of goods: 8716.3 Tanker trailers and tanker semi-trailers 10% 1 8716.3 Other 10% 9 8716.4 Other trailers and semi-trailers 10% 0 8716.8 Other vehicles 10% 0 8716.9 Parts 10% 0 * Custom Duty for items falling under 8703 & 8711, If imported as Completely Knocked Down (CKD) unit 10% If imported CKD kit contained prefabricated engine, gear box and transmission system 30%

If imported in any other form/ new 60% SIAM suggestions for VAT Implementation 1. VAT in all States VAT system of taxation required to be implemented simultaneously throughout the country in all States and Union Territories at the same time. This will avoid serious market distortions and enhances industry's competitiveness. 2. Uniform VAT Law and procedure India has often been described as a country with large market. But unfortunately this large market has been highly fragmented by interstate barriers. It is further complicated by State specific law on sale of goods. The wide divergence in the structure and practice has hampered free flow of goods and services within the country and

effected competitiveness of Indian Industry. Homogeneity is the essence of VAT and all States should come together to accept a common law under VAT. All forms, returns & declarations should be common to avoid artificial barriers and complexities. 3. State VAT Rate and Classification of goods Uniform rate structure across the country helps in avoiding diversion of trade from one State to another, checks unhealthy competition and reduces tax evasion. It helps automobile industry to plan and commit long term investments. Basic rationale needs to be developed for generation of revenue from industrial products. This should be long term and the share of taxation in the total value of the ultimate customer needs to be defined. SIAM recommends such a policy in taxing goods and services under VAT. Total taxes from both Centre and State as proposed by SIAM not to exceed 25%. Considering Cenvat at 16%, Designated rate should not exceed 9%. The classification of goods should be aligned to central taxes to reduce litigation. Uniform classification across all States and central taxes would create favourable environment for growth of industry. No separate classification of Capital Goods 4. Multiple levies and Industrial input One of the stated objectives of VAT is to reduce multiple levies. Number of rates under VAT should be 0%, 4% & RNR in addition to 1% on precious metal and 20% on petroleum products. All other levies like Octroi, Entry Tax should be abolished. Inputs used in the manufacturing should be taxed at 4% against issue

of declaration. There should not be any specific list of industrial input, as it will deprive the benefit to the industry using input other than the one mentioned in the list. Reduced rate on industrial input will avoid refund problem and avoid unnecessary interaction with the Department. Further when interstate transactions are zero rated, manufacturer selling predominantly in interstate ends up having huge input tax credit without set-off. Automobile manufacturers having one manufacturing facility in the country sells more than 80% of the production outside the Sate and forced to seek refund from the State Government for excess input tax credit. SIAM suggests VAT rate of 4% on all industrial input to mitigate the refund issue. 5. Set-off mechanism Set-off of tax paid should be allowed for all inputs including raw material, components, consumables, fuel and capital goods. Tax paid on services should be allowed to be set-off. Tax paid on capital goods should be allowed as set-off in full in the same year to avoid confusion and litigation later. 6. Interstate transactions All interstate transactions should be at zero rate. Further automobile manufacturers 'Stock Transfer' goods by setting up huge facilities to strengthen distribution net work in order to reach the product to the customer at the earliest and at least cost. This mechanism should not be affected even under VAT. 7. Sales Tax Incentives Automobile manufacturers have made huge investments, which are in phases in unviable locations. These locational disadvantages are partially offset by fiscal incentives. Any detrimental variations or

withdrawal will affect the viability of such investments. This may adversely impact the country's image as an attractive investment destination. It is heartening to note that all States have agreed in principle to honour all existing incentives under VAT SIAM suggests the following: Incentive Input Tax Exemption SIAM Suggestion . Refund Input Tax separately - adopt Maharashtra model Continue Deferment, refund input tax separately.

Output Tax Exemption Continue exemption, Option to Defer output tax Output Tax Deferral Input Tax Exemption & Refund Input Tax separately,Option to Defer output Output Tax Exemption tax Input Tax Exemption & Refund Input Tax separately,Option to Defer output Output Tax Deferral tax 8. Refunds Due to various reasons there is no alternative but to seek refund from the Government in case of excess credit. Given the state of finances, refunds will be difficult and uncertain while locking up working capital for industry. Refunds should be honoured within 15 days from the date of filing returns and credited to the assessee's account. Alternatively, VAT Entitlement Certificate on the lines of freely tradable DEPB may be considered. 9. Industry Representation Empowered Committee may consider inducting industry representation in the committee for transparency and smooth introduction of VAT.

Highlights of Union Budget 2007- 08 A. Main Highlights

Budget focused on Agriculture, infrastructure and social sector. Plan allocation increased by 18% - However, Capital expenditure increase only 9% against Revenue expenditure increase of 20%. Focus on Roads including NHDP allocation which is 7.2%; PPP model to be encouraged further. Increased outlay on JNURM from Rs 4595 cr to Rs 4987 cr. Use of Foreign Exchange reserve for infrastructure finance. Emphasis on developing skilled and trained manpower; Increased funds and Interest free loan for upgradation of ITIs. Setting up of Green House Gas Emission Committee.

B. Excise Duty Structure (in %)

Bio-Diesel is exempted from excise duty.

C. Customs Duty Structure

Peak Rate of Customs Duty reduced to 10% from 12.5%. Customs Duty on various Components & Raw Materials reduced.

D. Central Sales Tax

CST reduced to 3% from 4%. GST to be introduced with effect from April 1, 2010.

E. Education Cess

Additional Cess of 1% on all taxes for secondary and higher education. 2% Education Cess continued on Income Tax, Corporate Tax, Customs Duty, Excise Duty & Service Tax.

F. Direct Taxes

Weighted deduction for R&D U/s 35(2AB) of Income Tax Act extended for a period of five years. No change in rate of Income Tax on individuals or firms. Personal Income Tax exemption raised by Rs 10,000. Increase in Dividend Distribution Tax from 12.5% to 15%. Bringing of ESOPs under FBT.

G. Service Tax

No change in the Service Tax rate. Service tax net widened; Service tax imposed on design services.

WTO NAMA Discussions WTO negotiations on Industrial Goods have progressed in Geneva based on the Framework Agreement signed in August 2004. The discussions have mainly been technical. However, the mini-ministerial at Davos, which was attended by 30 trade ministers, including Mr Kamal Nath, Minister of Commerce, Govt of India has given a very strong political push to these negotiations. The following is the state of progress of NAMA negotiations till the Trade Negotiations Committee Meeting on February 14, 2005. Product Coverage: The main discussion on this has been what all products will NAMA cover. There is still some discussion on whether fish and fish products should be sent into agriculture or should they remain in the realm of industrial goods. This is because fish and fish products is one of the products that has been identified for sectoral initiative of zero for zero. There is also this issue of deciding which of the environmental goods will be taken into the NAMA negotiations for reduction/elimination of tariffs. The environmental goods negotiations are done under the

Trade and Environment Committee and not Negotiating Group on NAMA. Bound vs. Unbound: Many countries (all developed and many Latin American Countries) have called for complete binding of all tariffs by all countries. They also want LDCs to bind their tariffs without providing for any tariff reductions. India has, however, said in these discussions that there cannot be automatic binding of all tariffs. Sensitive products will have to remain unbound, India said. Philippines and Kenya share this view. EU has said that if any country wants to use the exceptions given in the Framework Agreement then these exceptions will have to be compensated in other areas. EU said that the level of ambition in the Doha Round should not be compromised at any cost. Formula: There is not much progress on the formula on the ground. However, USTR Robert Zoellicks statement at the Davos miniMinisterial that there can be two coefficients for the formula - one for developing countries and the other for the developed countires - has started a debate in WTO circles. The effect of such formula is supposed to ensure that all high tariffs are cut more substantially than low tariffs, but the separate coefficient for developing countries will allow them to bring their tariffs to a higher absolute ceiling than developed countries. US negotiators have, however, indicated that application of such formula will mean reduction in flexibilities. Flexibilities include keeping a percentage of tariffs outside the bound level or keeping some products out of the formula for lower cuts, both of which is included in the Framework Agreement. The EU felt that this can possibly bring down the level of ambition in the Doha Round. They said that the Framework Agreement in itself provides for enough flexibility.

Treatment of Unbound Formula: There is no consensus on the way to proceed. Countries like India have insisted that some sensitive products have to be left unbound while many countries have questioned this. Countries like Peru and Ecuador have asked all developing countries to bind 100% of their tariffs. US said that the problem of having unbound tariffs is only with 30 countries and therefore it can only be an exception but not the rule. Reactions from Various Countries: India: Developing countries should be given the flexibility to cut less than what the developed countries cut tariffs. There should be a window for keeping sensitive products unbound as well. Jamaica/Cuba/ Costa Rica: Larger implementation period required for deeper cuts. Different coefficients should be applied for developing and developed countries. Kenya: Without flexibility the word development will elude the negotiations. Level of ambition should be on development perspective of the Round. Sectoral Initiative: There is need for flexibility while deciding on sectoral, is what most developing countries are saying. But flexibility means different things to different countries. Latin America including Brazil seems okay with sectoral initiatives (zero for zero) if it is voluntary. Switzerland is for the critical mass approach. US has said that sectoral initiative is key to any tariff reduction formula to be agreed. What is Voluntary Approach in Sectoral Initiatives? Voluntary

will mean that countries can choose if they want to join the sectoral initiative or not. But if they decide to join then they will have to do so for all sectors that are brought under the sectoral initiative. If countries decide to stay away from the sectoral initiative then they will have to pay a MFN duty for export of those products, which will be fixed during the negotiations. Sectors will have to be negotiated but as of now the products that were decided earlier still stand - auto components, electrical and electronic products, footwear and leather goods, textiles and clothing, fish and fish products and gems and jewellery. But the US and Japan want more products added to this list. What is critical mass approach? In a meeting held last week it was decided that they would look at the same approach that was taken for the Information Technology Agreement. They feel that countries that account for 80 per cent of total global trade in the product will be part of the critical mass. Those outside can choose to join or not. India may be included in every sector if this approach is accepted. Special Provisions for Newly Acceded Countries: China has been leading this discussion and has said that newly acceded countries will need a completely different coefficient that will have smaller cuts in tariffs and longer implementation periods for these cuts. Elimination of Low Duties: Most developed countries have demanded that all countries must eliminate any low tariff completely to provide immediate market access opportunities in global trade. Most developing countries have rejected this proposal. Kenya specifically said that it was important for developing countries to keep nuisance tariffs. Nonreciprocal Preferences: There have been short discussions on this issue. Many countries that do not receive such preferences have

said that they need to be removed. However, there is a lot of support for such non-reciprocal preferences especially from ACP countries that receive such preferences from EU. Non-tariff Barriers: Two papers were presented on non-tariff barriers. One of the papers was from US on automobiles and another from US and New Zealand on wood products. India and many other developing countries have called for higher attention to this area of negotiations. India has submitted a proposal jointly with Brazil and Argentina on Tariffs: Communication to the Negotiating Group on Non-Agricultural Market Access from Argentina, Brazil & India 1. The Framework contained in Annex B to the July Framework Agreement represents the mandate provided for the non-agricultural products negotiations in paragraph 16 of the DMD. Accordingly, the formula shall reduce tariff peaks, high tariffs and tariff escalation and take fully into account less than full reciprocity in reduction commitments and special & differential treatment for developing countries. 2. The concepts of less than full reciprocity in reduction commitments and special & differential treatment are different: (i) Less than full reciprocity in reduction commitments has to be an in-built component of the formula and would be achieved through the incorporation of sufficiently higher coefficients for developing countries as compared to developed countries, resulting in higher percentage reductions for developed countries and taking into account the differences in tariff profile amongst members; (ii) Special & differential treatment relates to flexibilities in the

application of the formula, including longer implementation periods, less than formula cuts and the exclusion of some tariff lines. The present structure of the S&D provisions in the Framework contained in paragraph 8 of Annex B is the minimum necessary to meet the development goals of the developing countries in this regard. 3. Harmonization of tariffs is not an objective of this Round. It has not been envisaged in the Mandate and was not included in the July Framework as one of the necessary features of the formula. Harmonizing the customs tariffs amongst countries with differing industrial/ economic structures and with varying societal needs is not desirable and would not deliver the development objective of the Round. 4. After consideration of the various formulae proposed for these negotiations, a Swiss type formula incorporating each countrys tariff average seems best suited to address the mandate in its entirety. This could be expressed as:

where, t1 is the final rate, to be bound in ad valorem terms t0 is the bound base rate ta is the average of the current bound rates B is a coefficient, its value(s) to be determined by the participants The defining features of this formula are as follows: - The formula would apply to bound tariff lines; and - The coefficient B will be modulated to reflect the ambition in other areas relevant to market access agreed to for this Round; 5. All non-ad valorem duties shall be converted to ad valorem

equivalents before the adoption of the formula, and bound in ad valorem terms. 6. This is an equitable formula as it takes into account the present tariff commitments of Members. It improves the tariff profiles by compressing the dispersion of tariffs within each Member. It is transparent as it uses a well known factor, each Members tariff average, as the basis. It seeks to match the ambition level in all areas of market access negotiations in the WTO, with the inclusion of a B factor. The overall reduction commitment it imposes in percentage terms is proportional amongst developed and developing countries, removing the shortcoming in the simple Swiss formula that imposes much greater reduction requirements on the participating developing countries. 7. The impact of any tariff reduction formula depends on the numbers which are the essence of the formula. At this stage the important consideration is whether the formula by its nature complies with the mandate, i.e. whether it reduces or eliminates tariff peaks, high tariffs, and tariff escalation taking fully into account the special needs and interests of developing and least-developed country participants, including through less than full reciprocity in reduction commitments. We believe the above formula is still the most appropriate because: It is based on the current tariff profile; It has an element of progressivity in national tariffs; It allows for less than full reciprocity in reduction commitments; and Its liberalizing effect can be adjusted by variations in the coefficient B. 8. Having agreed on the basic structure of the formula, Members would have to address the part of the mandate related to Special and Differential treatment for developing country participants in the

application of the formula on current bound tariffs. Particular sensitivities of developing countries would be attended by longer implementation periods, less than formula cuts for some tariff lines and the exclusion of some tariff lines from any formula cut. The figures related to those flexibilities would have to be negotiated after an agreement on the formula itself. Treatment of Unbound Tariff Lines 9. Increasing the binding coverage to 100% is a desirable objective for this Round. However, it must be recognized that appropriate flexibilities are required by developing countries to achieve this objective. The average as on the base date of presently unbound lines will be marked up by x times, which shall be negotiated as indicated in the framework agreement. Thereafter, the marked up unbound tariff lines could be bound at an average level after the application of the formula. Developing country Members would then have the flexibility to fix individual tariff lines around this average. The formula for unbound tariff lines will be slightly modified i.e., the formula would apply only on the tariff average and not on a line by line basis. The modified formula for unbound tariff lines shall be as follows:

Where: tA1 is the average for newly bound lines xtA is the marked up tariff average of MFN applied rates as on the base date tA is the tariff average of MFN applied rates as on the base date B is a coefficient, its value(s) to be determined by the participants

Members covered by paragraphs 6&9 of Annex B of the framework shall not undertake tariff reductions in this Round. Members should also recognize liberalisation recently undergone by newly acceded members. 1. POLICY OBJECTIVES This policy aims to promote integrated, phased, enduring and selfsustained growth of the Indian automotive industry. The objectives are to:(i) Exalt the sector as a lever of industrial growth and employment and to achieve a high degree of value addition in the country; (ii) Promote a globally competitive automotive industry and emerge as a global source for auto components; (iii) Establish an international hub for manufacturing small, affordable passenger cars and a key center for manufacturing Tractors and Twowheelers in the world; (iv) Ensure a balanced transition to open trade at a minimal risk to the Indian economy and local industry; (v) Conduce incessant modernization of the industry and facilitate indigenous design, research and development; (vi) Steer India's software industry into automotive technology; (vii) Assist development of vehicles propelled by alternate energy sources; (viii) Development of domestic safety and environmental standards at par with international standards. 2. BACKGROUND

2.1 Automotive industry has universal5ly emerged as an important driver in the economy. Although the automotive industry in India is nearly six decades old, until 1982, only three manufacturers - M/s. Hindustan Motors, M/s. Premier Automobiles and M/s. Standard Motors tenanted the motor car sector. Owing to low volumes, it perpetuated obsolete technologies and was out of sync with the world industry. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models. After the lifting of licensing in 1993, 17 new ventures have come up of which 16 are for manufacture of cars. This industry currently accounts for nearly 4% of the GNP and 17% 0f the indirect tax revenue.

3. EXTANT POLICY 3.1 Before the removal of QRs with effect from 01-04-2001, the policy placed import of capital goods and automotive components under open general licence, but restricted import of cars and automotive vehicles in Completely Built Unit (CBU) form or in Completely Knocked Down (CKD) or in Semi Knocked Down (SKD) condition. Car manufacturing units were issued licences to import components in CKD or SKD form only on executing a Memorandum of Understanding (MOU) with the Director General Foreign Trade (DGFT). 11 companies signed MOUs with DGFT under which they agreed to:

i. ii. iii.

Establish actual production of cars and not merely assemble vehicles; Bring in a minimum foreign equity of US $ 50 Million if a joint venture involved majority foreign equity ownership; Indigenise components upto a minimum of 50% in the third and 70% in the fifth year or earlier from the date of clearance of the first lot of imports. Thereafter the MOU and import licensing will abate;

iv.

Neutralise foreign exchange outgo on imports (CIF) by export of cars, auto components etc. (FOB). This obligation was to commence from the third year of start of production and to be fulfilled during the currency of the MOU. From the fourth year imports were to be regulated in relation to the exports made in the previous year.

4. CURRENT STATUS OF INDIAN AUTOMOTIVE INDUSTRY 4.1 The industry encompasses commercial vehicles, multi-utility vehicles, passenger cars, two wheelers, three wheelers, tractors and auto components. There are in place 15 manufacturers of cars and multi utility vehicles, 9 of commercial vehicles, 14 of Two/Three Wheelers and 10 of Tractors besides 5 of engines. With an investment of Rs.50,000 crores, the turnover was Rs. 59,500 crores in Automotive Sector during 1999-2000. It employs 4,50,000 people directly and 100,00,000 people indirectly and is now inhabited by global majors in keen contention. 4.2 India manufactures about 38,00,000 2-wheelers, 5,70,000 passenger cars, 1,25,000 Multi Utility Vehicles, 1,70,000 Commercial Vehicles and 2,60,000 tractors annually. India ranks second in the production of two wheelers and fifth in commercial vehicles. 4.3 Indias automotive component industry manufactures the entire range of parts required by the domestic automobile industry and currently employs about 250,000 persons. Auto component manufacturers supply to two kinds of buyers original equipment manufacturers (OEM) and the replacement market. The replacement market is characterised by the presence of several small-scale suppliers who score over the organised players in terms of excise duty exemptions and lower overheads. The demand from the OEM market, on the other hand, is dependent on the demand for new vehicles.

4.4 The auto sector (excluding Tractors) attained a steep cumulative annual growth of 22% between 1992 and 1997. The Tractors achieved a cumulative annual growth of 16%. Component production grew by 28%. There has been a slowdown in the automobile sector in the past two years. However, the component industry maintained a low but positive growth rate mainly due to its export performance. Over the years, the component industry has maintained a 10% - 12% share of exports in the total production. 4.5 Roads occupy an eminent position in transportation as they, as per the present estimate, carry nearly 65% of freight and 87% of passenger traffic. Although, India has 3.3 million kilometers of road network, which is the second largest in the world, the Indian highways are getting overpopulated. Traffic management and road sense also need attention. 5. NEED FOR A COMPREHENSIVE AUTOMOTIVE POLICY 5.1 The extant policy has drawn many overseas companies into India but needs to be more investor friendly, address emerging problems and be WTO compatible. The Indian car market is full of possibilities; but present demand profile inhibits volume production, save by a few, and conduces contention rather than competition. World over, the majors have consolidated to elevate technology, enlarge product range, access new markets, cut costs and ingraft versatility. They have resorted to common platforms, modular assemblies and systems integration by component suppliers and E-Commerce. 5.2 The automotive industry is in the midst of a major structural transformation in today's globalised scenario. "System Supply" of integrated components and sub-systems is becoming the order of the day, with individual small components being supplied to the system integrators instead of the vehicle manufacturers. In this process, most of the SSI units manufacturing smaller individual components are on their way to become tier 2 and tier 3 suppliers, while the larger companies including most MNCs are being transformed into tier 1

companies, which purchase from tier 2 & 3, and sell to the auto manufacturers. 5.3 Indian auto sector needs to grow collaterally and in harmony with world industry. India has the potential to be a global automotive power. However, concerted efforts will be required to take auto manufacturing to a self-sustaining level where they shall have volumes, generate requisite technology and meet evolving emission requirements. 5.4 Volume is important for any manufacturing enterprise. However, it is more important for automobile sector, both for the manufacture of vehicles as well as auto components. Lack of volume will not only inhibit efficient manufacture but also R&D and introduction of new models. The investment and fiscal policies should create an environment for volume production and indigenous capability for innovation for small cars and auto components. 5.5 Auto components manufacturers have been slowly gaining global recognition and maintaining a certain level of exports despite the recent downturn. It should be possible to achieve an export target of US $ 1 billion by 2005 and US $ 2.7 billion by 2010. This would require three pronged marketing strategy: exports through OEMs for their global sourcing requirements, export to tier I manufacturers as a part of their international supply chain and direct exports to aftermarket. The main challenges are lower volume low scale, fragmentation, inadequate R&D/technology support, lower productivity levels, limited resources for international marketing and establishment of an efficient supply chain. 6. MEASURES TO REALIZE THE POLICY OBJECTIVES 6.1 Initiatives relating to investment, tariffs, duties and imposts will be the instruments to achieve the Policy objectives. These path governments economic reform and are in harmony with the commitments made to WTO.

6.2 Increased resource allocation to the highways sector to ensure collateral upgradation and development of road infrastructure in step with the increase in the population of vehicles. 6.3 An appropriate regulatory framework for smooth movement of traffic, safety and environmental aspects. 7. FOREIGN DIRECT INVESTMENT 7.1 Automatic approval for foreign equity investment upto 100% of manufacture of automobiles and component is permitted. 8. IMPORT TARIFF 8.1 The incidence of import tariff will be fixed in a manner so as to facilitate development of manufacturing capabilities as opposed to mere assembly without giving undue protection; ensure balanced transition to open trade; promote increased competition in the market and enlarge purchase options to the Indian customer. 8.2 The Government will review the automotive tariff structure periodically to encourage demand, promote the growth of the industry and prevent India from becoming a dumping ground for international rejects. 8.3 In respect of items with bound rates viz. Buses, Trucks, Tractors, CBUs and Auto components, Government will give adequate accommodation to indigenous industry to attain global standards. 8.4 In consonance with Auto Policy objectives, in respect of unbound items i.e., Motor Cars, MUVs, Motorcycles, Mopeds, Scooters and Auto Rickshaws, the import tariff shall be so designed as to give maximum fillip to manufacturing in the country without extending undue protection to domestic industry. 8.5 The conditions for import of new Completely Built Units (CBUs), will be as per Public Notice issued by the Director General Foreign Trade (DGFT) having regard to environment and safety regulations.

8.6 Used vehicles imported into the country would have to meet CMVR, environmental requirements as per Public Notice issued by DGFT laying down specific standards and other criteria for such imports. 8.7 Appropriate measures including anti dumping duties will be put in place to check dumping and unfair trade practices. 9. EXCISE DUTY 9.1 Motor Cars 9.1.1 The ownership of cars in India is just 6 per thousand of population as against 500 in the developed economies. The contribution of the auto sector to the GDP and employment is likewise low. Expansion of local demand holds great potential and is vital to install scale volumes of production.

9.1.2 Domestic demand mainly devolves around small cars not exceeding 3.80 meters in length. Small cars occupy less of road space and save on fuel. These capture more than 85% of the market. India can build export capability and become an Asian hub for export of small cars. The growth of this segment needs to be spurred. 9.2 Multi Utility Vehicles 9.2.1 MUVs are an important mode of economical mass transport in rural India due to poor road infrastructure and lack of good State transport system. They are the first vehicle purchased by a number of farmers, traders, small businessmen in rural and semi-urban markets. The Government will endeavour to provide fiscal incentives to this sector.

9.3 Commercial Vehicles 9.3.1 Presently excise duty on commercial vehicles sold by a manufacturer whether as a chassis or with a complete body is 16%. However, no duty is levied on the body that is built by an independent body builder on chassis bought from a manufacturer. This dispensation inveigles production of the complete trucks and buses by the chassis manufacturer and is detrimental to safety standards. The duty imposed on the construction of bodies by an independent body builder, small or organised sector, shall be equal to that of bodies built by a chassis manufacturer. 9.3.2 The Government will encourage fabrication of bus body on bus chassis designed for better passenger comfort instead of truck chassis as is the current practice. 9.3.3 The Government will promote the use of multi-axle vehicles for carriage of goods as they cause reduced environmental pollution and lesser wear and tear on road surface in comparison to the existing 2-axle trucks. 10. IMPROVING ROAD INFRASTRUCTURE 10.1 Traffic on roads is growing at a rate of 7 to 10% per annum while the vehicle population growth for the past few years is of the order of 12% per annum. Poor road infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry. A balanced and coordinated approach will be undertaken for proper maintenance, upgradation and development of roads by encouraging private sector participation besides public investment and incorporating latest technologies and management practices to take care of increase in vehicular traffic.

10.2 For the convenience of traveling public the Government shall also promote multi-modal transportation and the implementation of mass rapid transport systems. 11. INCENTIVE FOR RESEARCH AND DEVELOPMENT 11.1 The Government shall promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives. 11.2 The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for sponsored research and in-house R&D expenditure. This will be improved further for research and development activities of vehicle and component manufacturers from the current level of 125%. 11.3 In addition, Vehicle manufacturers will also be considered for a rebate on the applicable excise duty for every 1% of the gross turnover of the company expended during the year on Research and Development carried either in-house under a distinct dedicated entity, faculty or division within the company assessed as competent and qualified for the purpose or in any other R&D institution in the country. This would include R & D leading to adoption of low emission technologies and energy saving devices. 11.4 Government will encourage setting up of independent auto design firms by providing them tax breaks, concessional duty on plant/equipment imports and granting automatic approval. 11.5 Allocations to automotive cess fund created for R&D of automotive industry shall be increased and the scope of activities covered under it enlarged. 12. BUILDING BYE LAWS FOR RESIDENTIAL, COMMERCIAL AND OTHER USES 12.1 With the growth of vehicles, smooth traffic movement has come under severe strain. The problem has been aggravated because of

inadequate provision of parking facilities generally. Starting with metropolitan and important towns, the Government will pursue with State Governments and Local bodies amendments to bye laws for upward revision of the parking norms for new residential buildings, construction of common parking for existing residential areas besides parking upgradation in all commercial areas. Multi-storied parking shall also be encouraged. 13. ENVIRONMENTAL ASPECTS 13.1 The automotive and oil industry have to heave together to constantly fulfill environment imperatives. The Government will continue to promote the use of low emission fuel auto technology. 13.2 The Government after considering the recommendations of the Expert Committee on Auto Fuel Policy headed by Dr. R.A. Mashelkar, have approved a road map for implementation for the auto fuel quality consistent with the required levels of vehicular emissions norms and environmental quality. The Government will formulate a comprehensive auto fuel policy covering the other related aspects and ensure availability of appropriate auto fuel/fuel mixes at minimum social costs across the country. Suitable institutional mechanism will be put in place for certification, monitoring and enforcement of different technologies/fuel mixes. Appropriate fiscal measures will be devised to achieve milestones in the roadmap for implementation of auto fuel policy. 13.3 In the short run, the Government will encourage the use of short chain hydrocarbons along with other auto fuels of the quality necessary to meet the vehicular emissions norms. 13.4 There is prime need to support the development and introduction of vehicles propelled by energy sources other than hydrocarbons by promoting appropriate automotive technology. Hybrid vehicles and vehicles operating with batteries and fuel cells are alternatives to the conventional automobile, which in their early beginnings, lie intreasured. As an impetus for the development of

such vehicles, an appropriate long-term fiscal structure shall be put in place to facilitate their acceptance vis--vis vehicles based on conventional fuels. 13.5 Internationally, the practice is to levy higher road tax on older vehicles in order to discourage their use. In India, the road tax on vehicles varies in nature and quantum among the states. Lifetime road tax is also in vogue. The endeavour will be to move to the international model.

13.6 In order to facilitate faster upgradation of environmental quality, the Govt. will consider having a terminal life policy for commercial vehicles alongwith incentives for replacement for such vehicles. 14. SAFETY 14.1 Government will duly amend the Central Motor Vehicles Rules, Bureau of Indian Standards (BIS) and other relevant provisions and introduce safety regulations that conform to global standards. 14.2 Testing and certification facilities need to be revised and strengthened in accordance with safety standards of global order. Government, in partnership with industry, will tend to this requirement. 15. HARMONISATION OF STANDARDS: 15.1 Government recognises the need for harmonisation of standards in a global economy and will work towards it.