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Event update: Automobiles; National Automotive Policy - a balanced approach

Event

The Ministry of Heavy Industries released a draft version of National Automotive Policy for discussion. While the policy has generic goals such as increasing exports, employment, safety measures, it also has specific proposed guidelines with respect to: (a) Emission Norms (b) Green Mobility and (c) research and development (R&D) tax benefits. A notable feature is the focus on Green Mobility (to include Hybrids, CNG, LPG) rather than just Electric Vehicles (EV) (as advocated by the Ministry of Transportation).

Impact

Emission norms and Fuel efficiency

Norms beyond BSVI: The draft looks at a smoother roadmap to be clearly laid out beyond FY20. It looks at cutting nitrogen oxide (NOx ) levels for passenger vehicles (PV) by upto 75% and for commercial vehicles (CV) by ~40% by 2028 compared to Bharat Stage (BS) VI (BSVI) norms. For two wheelers (2W), the policy looks at introducing limits on particles such as Nanomethane Hydrocarbons (NMHC) (refer to Exhibit 3).

Lower CO2 emissions through Corporate Average Fuel Economy (CAFE) regulations: The draft aims to define corporate average CO2 g/km targets for all PV manufacturers from 2020 onwards, with a provision for economic penalties for those that do not meet these targets. There has been a CAFE system in place since April 2017 (that targets an 18% improvement in PV fuel consumption for 2022 versus 2012). However, the current system is rather weak, as it does not impose economic penalties on defaulting car makers.  Additionally, in the second phase, the plan envisages developing provisions for banking of CO2 credits and trading of credits between companies.

Introduce a composite criterion based on length and CO2 emissions to classify vehicles for taxation: Unlike the current taxation, which is based solely on the length of the vehicle, the draft proposes a composite system that would keep the cess on vehicles in accordance with the CO2 systems. The new draft would keep the base GST rate at 28% and vary the cess to according to emission levels. If emissions of vehicles are within the stipulated range, the tax rate will remain at current levels; however, if the CO2 emissions are higher than targeted levels, the cess increases meaningfully. The targeted CO2 emission would get stricter (emission expected to reduce from 155g/km in 2018 to 110g/km in 2028) with time (refer to Exhibit 2). This could have an adverse impact on some high-powered vehicles that tend to have higher CO2 emissions.

Green Mobility- Not just EVs, Benign targets

The policy does not refer to EVs in particular, but rather concentrates on green mobility (hybrid, CNG, EVs, LPG) – the focus will be on technology agnostic approach to reducing emissions. This seems to be a departure from the EV focussed policy that the government seemed to be favouring.  Further, we note that the draft refers to only relatively benign targets (compared to the previously stated target of 100% EVs by 2030)

• 25% of all vehicles from 2023 and 75% of all vehicles from 2030 procured by central and state government
• 50% of all vehicles from 2023 and 100% of all vehicles from 2030 procured by municipal corporations in metros   

R&D – Higher spends, higher rebates

Unsurprisingly, the draft refers to continuing with weighted tax deductions for R&D expenditure. However, it does go a step ahead and advocate for deduction based on R&D spends as a percentage of sales – the higher the proportion, the greater the deduction. If implemented, it could incentivize higher R&D spends.

• 100% if R&D investment is 4% of turnover
• 150% if R&D investment is 2-4% of turnover
• 250% if R&D investment is >4% of turnover

Our View

We note the Automotive Policy is still at a draft stage and even after being finalized, will likely be a guiding document rather than a firm plan. Hence, while the policies could potentially benefit players with strong hybrid technology (Maruti Suzuki) / higher R&D spends (M&M, Tata Motors) and work against OEMs with large SUVs (M&M), the impact is still far from clear.  Nonetheless, the document does highlight the possible regulatory thrust in the coming years. The recommendations seem to be well balanced – focusing on environment/pollution while allowing the industry time to adjust; however actual implementation and policies will be key.