The Indian automobile industry is one of the key sectors stimulating India’s economic growth. The industry is known for extending significant support to various other sectors such as logistics, passenger transportation, agriculture, etc. Being a major driver of manufacturing Gross Domestic Product (GDP), exports and employment, the industry has exhibited that India can be a prime destination for expansion.
In recent times, the automobile sector has been closely identified with increasing air pollution levels, causing serious environmental, and health impacts. Governments across the globe, India included, are under pressure to monitor pollution levels, and they have also sworn to bring down emissions by 2030. In addition to these, the sector has been severely impacted due to COVID-19-related restrictions and economic constraints.
In order to make India a hub for green vehicles, and new advanced automotive technologies, with an aim to also reduce its carbon footprint, on September 15th the government has rolled out the Production Linked Incentive (PLI) scheme focusing on incentivising the electric and hydrogen fuel cell vehicles.
The PLI scheme, having a financial outlay of Rs 25,938 crore (earmarked for five years) for the auto sector, comprises of two sub-schemes namely: First, the Champion OEM Incentive Scheme (COEM) for original equipment manufacturers (OEMs) engaged in manufacturing of Battery Electric Vehicles (BEV) and Hydrogen Fuel Cell Vehicle (HFCV), and; second the Component Champion Incentive Scheme (CCIS) for advanced automotive technology components used in two-wheelers, three-wheelers, passenger vehicles, commercial vehicles, tractors etc.
To maximise investments in the PLI scheme from existing and new non-automotive investors, the participation has been subjected to fulfilment of certain eligibility criteria related to fresh investments, global group revenue, global group investment, and global net worth. Also, to ensure that the investors seek maximum benefits from the scheme, the turnover-based incentives would be provided, which will vary between 13-to-16 percent under the COEM, and 8-to-11 percent under the CCIS. This is along an additional 5 percent incentive for domestic manufacturing of components of the BEVs and the HFCVs.
The framework of the scheme suggests that the government is inclined towards promoting new age technologies that pave the way for sustainable environment; and it signals to the world that India intends to be a key player in the automobile sector. This scheme is being announced at an apt time for India as the auto industry realigns its supply chain globally, and thus India can benefit from this changing scenario, to become an integral global manufacturing base.
Though the scheme thrusts on incentivising new-age technologies, the traditional market players engaged in manufacturing petrol- or diesel-based vehicles are a little disappointed with it; as the scheme fails to compensate the loss of benefit (due to gap in rate of export incentives under the Remission of Duties and Taxes on Exported Products (RoDTEP) as compared to the Merchandise Exports from India Scheme (MEIS)), especially for products such as internal combustion engines.
Nevertheless, with the introduction of this scheme, the government expects that the auto sector would attract fresh investments of over Rs 42,500 crores in five years which would enable additional production of up to Rs 2.3 lakh-crore, and eventually, with a multi-fold increase in production, it is anticipated that the scheme will assist in generating up to 750,000 new job opportunities.
Historically it has been observed that all the major economies in the world have focused on manufacturing, and eventually they’ve became a critical part of the global value chain in several sectors. India, which was more focused on agriculture and services, needed some push to match peer countries’ scale of manufacturing and employment. With reforms such as the PLI scheme, investment in the manufacturing sector is going to intensify multi-fold. This would contribute to the GDP growth, and give a promising boost to India’s aim of becoming a $5 trillion economy by 2025.
Also, while the scheme is only for manufacturers fulfilling the relevant criteria, it is imperative to note that the benefit would trickle down to the MSMEs in different tiers. The scheme would not only benefit the economy at the macro-level, but also support in amplifying demand-supply indicators at the micro-level.
Though, the whole scheme appears to be promising, successful execution of the intent would require considerable investment in charging and other infrastructure to support the operation of the BEVs and the HFCVs amongst consumers. It would be interesting to see the developments in this regard as the government may plan for establishing such infrastructure on its own or under Public-Private Partnership (PPP) models.
(Anshul Girotra, senior tax professional, EY, contributed to this article)
Parul Nagpal is Director – Tax & Regulatory Services, EY. Views are personal and do not represent the stand of this publication.