India-EU FTA likely to make premium luxury cars less expensive

New Delhi: Premium luxury European cars, such as BMW, Mercedes, Lamborghini, Porsche, and Audi, are set to become cheaper in the Indian market once the bilateral free trade agreement comes into force, likely next year, as India will offer quota-based import duty concessions under the pact, an official said.

The EU will eliminate duty in a phased manner for Indian automobiles, whereas India will reduce the levies to 10 per cent for specified numbers.

Italian carmaker Lamborghini, which sells vehicles in India with prices starting around Rs 3.8 crore, imports all its models. The EU FTA is likely to be beneficial for the company.

India and the European Union (EU) on Tuesday announced the conclusion of negotiations for the free trade agreement (FTA). It is expected to be signed later this year and may come into force from early next year.

European manufacturers and Indian consumers were keenly watching the progress of this trade pact, talks for which were started in 2007. Extending duty concessions in the sector was one of the major contentious issues that led to a pause in negotiations in 2013.

As the country's auto sector is strengthening, India is extending duty concessions under FTAs. It has provided quota-based concessions to UK car makers also.

As per the agreement, India and the EU have negotiated on a “quota” based duty concessions, the commerce ministry official said, adding that the EU has a “very” aggressive demand for this sector.

India also protects its auto industry strongly, as the sector is growing at a faster pace and is a major employment creator. It is one of the core areas in the ‘Make in India’ initiative of the government.

"The EU has got a very well laid out auto industry, one of the most advanced auto industries, and their cars are one of the best, and it is a reality," the official said.

"Taking note of sensitivity on both sides, we have agreed to a quota-based ecosystem, wherein we are trying to take care of each other’s sensitivities," the official added.

Explaining further, the official said India's auto sector is largely dominated by small cars (retail price Rs 10 lakh - Rs 25 lakh) and the EU's interest in that area is "not great".

"So, that has been taken cognisance of, and we have decided that cars that are likely to sell below Rs 25 lakhs in this country, the EU will not be exporting those cars to India. They may manufacture it here, but they will not be exporting those cars," the official said.

For India, it is the most important market (cars below Rs 25 lakh). The Indian industry is very strong there, and this is a very fast-growing market in the country, the official added.

The Rs 25 lakh vehicles include petrol, diesel, and hybrid models. Above Rs 25 lakh, India's market is limited, but its interest is high as they are good manufacturer in this segment.

"Having taken care of that, we have given them quota-based market access. The market has been segmented into three parts beyond that. And the quota will increase in a phased manner," the official said.

Under the quota system, duty concessions will be provided for a specified number of vehicles.

At present, India's import duty in the automobile segment ranges from 66 per cent to 125 per cent.

India will not give any out-of-quota duty reduction, as it wants the EU firms to look at the possibility of manufacturing in India.

"The idea is that beyond quota, if your market grows, you come and build it here, as India is a growing market," the official pointed out.

"We would like European car manufacturers to test this market, come here, and if they find this market good, they set shops here, which will be win-win again, because they will not do 100 per cent on capital. They will have their supply chains from the EU. So, you will have some bit of value-add, we will have some bit of value-add," the official said.

The quota-based system will help create jobs in both economies.

“That's how we have designed it, and we hope this will create some competition and bring in a lot of manufacturing technology in the medium and long run. So, that will be something good for consumers and in the long run, good for our manufacturing ecosystem also," the government official said.

"For every car quota that we have given them, we take 2.5 tile quotas from them. So, if I give them 1 lakh cars, I will take 2.5 lakh cars," the official added.

"They are twice our market. We are able to sell in that market, and they will give us complete duty-free access. We are giving quota duty reduction, phased duty reduction in five years." Explaining further, the official said the actual threshold is 15,000 euros (about Rs 15 lakh). That means a car worth Rs 15 lakh will come to the Indian ports from the EU under the FTA. After that, there will be duty, tax, registration, and it will add another Rs 10 lakh. It can go up to Rs 12 lakh or more with 28 or 40 per cent GST, insurance, freight transportation, and logistics.

For electric vehicles (EVs), India's quotas will start from the fifth year of the agreement.

"It will not start from day one because our EV market is growing, and the EV production is growing. So, we have actually protected them for the first five years," the official said.

Duty reduction in the EVs will vary in every segment.

"In some segments, it will be 35 per cent and in some, it will be 30 per cent in the first year. And then it will go down slowly,” the official said.

At present, imported passenger vehicles priced below USD 40,000 attract a basic customs duty of 70 per cent, and those priced above USD 40,000 are taxed at an effective customs duty of 110 per cent.

The government has taken several measures to support the domestic automobile industry.

The Automotive Mission Plan 2047 (AMP 2047) is an industry-led initiative, actively supported by the Indian government, aimed at making the Indian industry globally competitive.