AUTOMOTIVE TYRE MANUFACTURERS’ ASSOCIATION

AUTOMOTIVE TYRE MANUFACTURERS’ ASSOCIATION

The following major submissions of Tyre Industry are set out for favourable consideration by the Finance Ministry:

A. Reduction in Excise Duty & Customs Duty rates

1. Reduction in Excise Duty on Tyres and Tubes from 16% to 8%

2. Correction in anomaly in Customs Duty structure for Natural Rubber –from 20% to preferably 7.5% or 10% and reduction in Customs Duty on key raw-materials of Tyre Industry from 12.5% to 10%

3. Waiver of Customs duty on raw materials not manufactured domestically- viz. Butyl Rubber, Polyester Tyre Cord and Styrene Butadiene Rubber (Tyre Grades)

Nylon Tyre Cord Fabric

Carbon Black

Synthetic Rubbers

Rubber Chemicals etc

• Tyre Industry Raw-Materials -Butyl Rubber, Polyester Tyre Cord (Not produced indigenously) SBR (1502 & 1712 Grades )

II. Brief Resume of Indian tyre industry

1. India is one of the few countries which has attained self-sufficiency in tyre production. All categories of tyres are manufactured in India, from Off the Road (Earthmover) tyres weighing over 1.5 tonnes a tyre to Moped tyre weighing 1.5 kg, from rugged truck tyres to high performance passenger car radial tyres. Some limited category of tyres which are not manufactured in India, e.g. aircraft tyre, snow tyres etc., is more because of commercial reasons (aircraft tyre demand is limited and size spectrum varied) or climatic conditions (requirement of snow tyres does not exist as in European countries). In brief, India is amongst a select band of countries which not only meets its complete requirement of automotive tyres but also has been consistently exporting tyres to over 65 countries worldwide for over three decades.
2. On the domestic front also, whether it is meeting the requirement of OEs (vehicle manufacturers), aftermarket (replacement demand for tyres), requirement of State Transport Undertakings (STUs) for bus tyres, Government supplies, etc. Indian tyre industry caters to the requirement of all segments of tyre demand. For all new models of commercial vehicles, passenger cars, jeeps, two-wheelers or farm vehicles introduced by OEs in the Indian market, Indian tyres are generally available at the time of launch of the vehicle or is one of the first components to be indigenized.
3. Tyre production has also kept pace with vehicle production (irrespective of the automobile growth trends, from low growth to high growth in segments like motorcycles and passenger cars). Since tyres are under OGL (freely importable) and Customs duty is currently 12.5% (with preferential customs duty rate varying from ‘nil’ to 10.75% under various regional/ bilateral trade agreements), import volume of tyres is progressively on the increase. This is due to essentially commercial reasons. With further reduction of Customs duties imminent and greater proportion of regional/ multilateral trade at lower Customs Duty rates, increased level of import / export of same product is expected. Indian tyre industry has the capacity and capability to meet the challenge of imports, provided such imports are not in contravention of established norms (i.e. are not under-invoiced, dumped etc.) and are in accordance with the domestic regulations.
4. Indian tyre industry has introduced new products and processes in line with the market requirements… from high performance passenger radial tyres, all steel truck radials, tubeless radials, farm radials… Indian tyre industry has progressed on the tyre technological ladder.
5. Technological advancement is primarily by way of ‘adaptation’ of technology introduced in developed countries, i.e., tailoring the product to meet domestic requirements. Basic R&D in tyre technology is not only expensive but also proprietary with the top 3 global tyre companies spending an estimated US$ 1.3 billion (Rs. 6000 crores +) on R&D every year.
6. Growth in tyre demand in developed countries is either declining or growth level is low and ranges between 1%-3% in most developed countries. However, due to factors like:

• low automobile penetration levels in India so far which is changing now,

• low running (km. per day for commercial and passenger vehicles in India as compared to developed countries),

• improving infrastructure (especially road conditions),

tyre demand in India is expected to be from moderate to high level, in the medium and long term.

1. Indian tyre industry is fully geared to meet the challenge of growth in tyre demand, meet export targets and face growing volume of imports.

This note sets out how fiscal amendments and dispensations can place the tyre industry on an accelerated growth path.

III. Current Rate of Taxation (Customs & Excise Duty Rates) on Tyres

• Rate of Customs Duty (MFN)-12.50%

• Preferential customs tariff

[under Regional Trade Agreements (RTAs)]

- Asia Pacific Trade Agreement - 10.62% - Passenger Car

(formerly Bangkok Agreement) 10.75% - All other tyres

- Indo-Sri Lanka Free Trade Agreement- ‘Nil’

- SAFTA - 10%

• Rate of Excise Duty-16%

IV. Tyre Production and Export & Import Trend

A ) Categorywise Tyre Production

Tyre weight varies significantly, from tyre weighing 1.5 kg. for Moped to an Earthmover tyre weighing 1.5 tonnes (i.e. 1000 times). Hence, tyre production in numbers is not indicative of the performance of tyre industry. Natural Rubber consumption in weight (being the principal raw-material) is more representative of the performance of tyre industry.

During the year 2005-06 over the year 2004-05, Natural Rubber consumption registered 9% increase and accordingly the growth estimate of tyre industry during the same period can be taken as 7%.

The following table gives tyre production of major tyre categories during 2005-06 with corresponding figures during the previous financial year.

Tyre Production

(Fig in Lakh Nos)

Tyre Category	2004-05	% Change YoY	2005-06	% Change YoY
Truck & Bus	110.91	2	119.41	8
Passenger Car	118.62	19	136.05	15
Jeep	14.63	2	12.72	-13
Light Commercial Vehicle	39.45	21	45.29	15
Tractor (Front)	13.11	14	13.83	5
Tractor (Rear)	10.96	30	11.34	3
Tractor (Trailer)	4.08	-2	5.96	46
Scooter	99.92	8	95.19	-5
Motor cycle	181.27	9	210.53	16
Animal Driven Vehicle (ADV)	1.97	-33	3.24	64
Industrial	3.77	28	5.15	37
Off the Road (OTR)	0.89	20	1.06	19
Total	600.82	10	660.32	10

B ) Tyre Exports

(Fig in Lakh Nos)

Tyre Category	2004-05	% Change YoY	2005-06	% Change YoY
Truck & Bus	25.04	12.22	24.09	-3.80
Passenger car	10.25	73.22	10.53	2.76
Light Commercial Vehicle	11.31	17.51	13.91	22.98
Tractor (Front)	0.18	-4.15	0.13	-26.34
Tractor (Rear)	0.85	-5.65	0.99	16.68
Motor cycle	0.63	32.49	0.85	35.40
Scooter	2.03	67.87	2.90	43.09
Off the Road	0.23	10.50	0.33	43.23

C ) Tyre Imports

(Figs in ‘000 Nos)

Tyre Category	2004-05	% Change YoY	2005-06	% Change YoY
Truck & Bus	221	151%	506	129%
Passenger Car	780	75%	695	-11%
Motorcycle	93	-11%	115	23%

V Implications of RTAs on Tyres / Tyre Industry – With special reference to Tyre Imports from China

Asia Pacific Trade Agreement (formerly Bangkok Agreement) – China and South Korea are members of the Bangkok Agreement. 88% of the total Truck and Bus tyre imports into India and 66% of the passenger car tyre imports into India from these two countries at an effective customs duty of 10.75%.

Indo-Sri Lanka Free Trade Agreement – 11% of the total passenger car tyre imports into India and 3% of the truck and bus tyre imports are from Sri Lanka at ‘nil’ rate of customs duty under Indo-Sri Lanka FTA.

South Asian Free Trade Agreement (SAFTA) – Tyres are eligible for concession in applicable rate of Customs duty, 10% vs. normal customs duty of 12.5%.

In other words, over 91% of the imported truck and bus tyres and 71% of the imported passenger car tyres are eligible for effective rate of Customs duty which is lower than the applied rate of customs duty (i.e. 12.5%).

This factor assumes significance in the context of the tyre industry submission for correction in the existing inverted duty structure on Natural Rubber and fixing Customs Duty at 7.5% or 10% and submission for reduction in customs duty on key raw-materials of tyre industry from existing 12.5 % to suggested 10%.

Cheaper imports of tyres, particularly through the route of concessional Customs Duty under Regional Trading Agreements (RTAs), already entered into and future Agreements, may eat into the total pie of domestic demand and hence constrain the envisaged domestic production growth of tyres.

Section – II

PRE BUDGET MEMORANDUM : POLICY / TAXATION

RELATED ISSUES / SUBMISSIONS OF ‘TYRE INDUSTRY’

1. Reduction in Excise Duty on all categories of Tyres and Tubes from 16% to 8%

Current Excise Duty rate on tyres is 16%. In addition, there are a number of taxes on inputs and services used for production, which are not Cenvatable, and hence the tax incidence on tyres works out to be quite high i.e. much more than 16%.

A Statement giving Tax Content on select categories of Tyres is enclosed as Annexure "A". Considering the fact that tyres are essentially fitted in vehicles for transportation of common man and his goods [including tyres for Animal Drawn Vehicles (ADV)], there is need to bring down the Excise Duty on tyres to 8%. Such a step would make road transport more economically viable, essentially giving relief to the common man.

Submission

Tyre is essential for the growth of economy and used in movement of goods and common man. By reducing Excise Duty on Tyres, road transportation becomes more cheaper thereby reducing the cost of commodities. Tyre Industry requests for reduction of the rate of Excise Duty from 16% to 8%.

2a) Correction in anomaly in Inverted Duty Structure ( Customs ) –

Natural Rubber (HS Code 4001 21 00)

In the Union Budget 2006-07, peak rate of customs duty was reduced from 15% to 12.5% for tyres and raw-materials of tyre industry, except Natural Rubber on which customs duty was retained at the 2004-05 level of 20%. This has resulted in a serious anomaly of Customs duty on raw-material (Natural Rubber @ 20%) being higher than the duty on finished product (tyres @ 12.5%).

Additional points / justification to bring about the suggested correction in inverted duty structure are given below: 

1. Natural Rubber – Production : Consumption Scenario

Growth in consumption of Natural Rubber over the next few years is expected to be around 5.5% per annum whereas production growth of Natural Rubber is expected to be in the range of 3%, thereby resulting in widening gap between production and consumption.

The following figures give Natural Rubber Production and Consumption Scenario, estimated by Rubber Board for 2006-07:

Production - 8,31,000 MT

Consumption - 8,41,000 MT

Shortfall - 10,000 MT

The shortfall between production and consumption of Natural Rubber has to be met by import at higher Customs duty of 20%, involving additional financial burden on tyre industry. Hence unless the inverted duty is corrected, in the coming years the financial burden on tyre industry would go on increasing.

2. Natural Rubber – Key Raw-Material for Tyre Industry

Tyre industry is raw-material intensive and the principal raw-material used by tyre industry, viz. Natural Rubber, accounts for 42% of raw material cost of tyre industry. A higher Customs duty on key raw-material of tyre industry distorts the cost structure and is not in line with the accepted principle in respect of Customs Duties, i.e., the lowest rate on raw-material, higher rate on intermediates and the highest rate on finished product (in this case, tyres).

3. Effective Rate of Customs Duty on Tyres under RTAs

As stated earlier, concessional / preferential Duty on automotive tyres under Regional Trade Agreements is much lower than the applied rate of 12.5%.

With the ‘effective rate’ of Customs duty on tyres being even lower than 12.5%, the inverted duty structure with Customs duty on Natural Rubber @ 20% becomes even more pronounced.

2b) Reduction in Customs Duty on key raw-materials of Tyre Industry

As stated above, Tyre Industry is raw-material intensive. Raw material cost accounts for approx. 55% of tyre industry turnover and 70% of the production cost. 54% of the total natural rubber consumption is by tyre sector.

The Finance Ministers, while presenting the Union Budget in the last 3-4 years have defined the roadmap of import tariff regime. The generally accepted principle being having the lowest rate of customs duty for ‘raw-materials, intermediates and components’ and the highest rate of duty for ‘final products’. This principle has been endorsed and recommended in Reports of expert Committees, viz. Interim Report of Kelkar Committee, Recommendations of Arvind Virmani Committee etc.

Tyre Industry suggests the following structure of Customs Duty for its principal raw materials:

S.No. HS Code Raw-Material(s) Existing Proposed  Customs Duty (%)

i) 5902 10 10 Nylon Tyre Cord 12.5% 10%

i) 4002 20 00 PBR 12.5% 10%

iii) 2803 00 10 Carbon Black 10% 5%

iv) 3812 10 00/30 10 Rubber Chemicals 12.5% 10%

v) 7312 90 00 Steel Tyre Cord 12.5% Nil

Submission

In view of the reasons/justification given above, ATMA would request that customs duty on Natural Rubber (HS Code 4001.21) be reduced from 20% to preferably 7.5% or 10%.

Furthermore, tyre industry would request for reduction in the customs duty on major raw-materials used by tyre industry (given above S.No. i) – v) ) from existing 12.5%/10% to 10%/5%/Nil.

3. Waiver of Customs Duty on following key raw-materials of tyre industry which are not manufactured domestically

1. Butyl Rubber (HS Code 4002 3100)
2. Polyester Tyre Cord (HS Code 5902 20 00)
3. Styrene Butadiene Rubber (1502 & 1712) (HS Code 4002 19 00)

The above stated key raw-materials of tyre industry are NOT manufactured domestically.

Butyl Rubber is used for the manufacture of inner tubes of tyres. Butyl Rubber has better air retention capacity compared to Natural Rubber. Hence Butyl Rubber is the preferred choice for the manufacture of inner tubes. Waiver of Customs Duty on Butyl Rubber would enable the tyre industry to be more competitive vis-à-vis imports of tyres/tubes, especially in view of steep increase in price of Butyl Rubber in the international markets due to hike in petroleum/derivative prices.

Polyester tyre cord is used for the manufacture of radial tyres. Radial tyres, in comparison to bias/cross-ply tyres, offer multiple benefits especially greater mileage and reduced fuel consumption. This has been experienced in the passenger car tyre segment. However, since the price of radial tyre is 25% higher and commercial vehicle tyre segment is extremely price sensitive, radialization has not gained momentum in the truck/bus tyre segment. ATMA estimates that increase in radialization level in the truck/bus tyre segment from current 2%-3% to 25%, as has been achieved in our neighbouring/several developing countries, can result in annual and recurring fuel saving of over Rs. 2,000 crores.

Synthetic & Chemicals Limited was the only manufacturer of SBR 1502 & SBR 1712 in India. This company is closed and stopped production since July 1999. SBR is one of the major elastomers used for manufacturers of tyres. Incorporation of SBR in the product mix for tyre increase abrasion and fatigue resistance.

Submission

ATMA request is for waiver in Customs Duty on Butyl rubber, Polyester Tyre Cord and Styrene Butadiene Rubber ( Tyre Grades: S-1502 & S-1712).

2. OTHER ISSUES

4. Collection of Anti Dumping Duty in Excess -Refund Unjustly ‘held’ - anti dumping duty collected by Customs on imports of Nylon Tyre Cord Fabric (NTCF) Styrene Butadiene Rubber (SBR) has not been refunded to tyre companies

Anti dumping duty is levied by a notification issued by the Finance Ministry. The aggrieved parties have the option to go to CESTAT/High Court. Wherever CESTAT/High Court passes an appropriate Order, the notification is amended with retrospective effect from the date of issue of the notification. In some cases, the anti dumping duty is removed or reduced by CESTAT/High Court.

Refund in such cases are either pending or rejected on the ground of unjust enrichment provisions of Section 12B of the Central Excise Act, 1944. Thus Customs Authorities are not refunding the amount so credited, notwithstanding that the CESTAT has quashed the anti dumping duty.

CESTAT in its Order in the case of Caprihans India Ltd. vs Collector of Customs, Mumbai 2001 (129) ELT 162, held that duty levied under Section 9A of the Customs Tariff Act cannot be considered as duty realized under Section 27 of the Customs Act of 1962. The question of unjust enrichment contained in the Customs Act cannot have any impact on the special provisions contained in Section 9(2) of the Customs Tariff Act of 1975 under Section 12B of the Central Excise Act..

Submission

Appropriate Notification be issued to the effect that wherever superior courts had waived / reduced Anti Dumping Duty from the date of its imposition, the excess Anti Dumping Duty collected is refunded to the assessee and not credited to the Unjust Enrichment Fund.

5. Unjust Enrichment - Amendment to Section 11B of Central Excise Act, 1944 and Section 28D of the Customs Act 1962 -

Provisions in both the Customs and Excise Acts stipulate that the assessees give detailed proof to the effect that higher (excess) amounts collected by Excise/ Customs have not been passed on by the assesses in the course of sale of goods. In such cases, despite submitting voluminous documents to show that burden has not been passed on, the same is not accepted that the amount has not been charged to the consumer. Further, It takes considerable time to furnish several details and proof on the matter.

In the meanwhile, price increase may take place due to several other reasons, viz. increase in raw-material/manpower costs, exchange rate fluctuations etc. In such cases, there is tendency on the part of Excise/Custom to connect the same with passing burden to the customer, though in actual, they may not related to each other at all.

Submission

In line with the thinking of the Government to reduce the transaction cost and reduce avoidable interface between the industry and the Department, it is submitted that provisions in the Acts be amended to the effect that refunds are made to the assesses on production of Price Lists of companies to prove that the Duty burden has not been passed on to the consumers and also duly certified by the Company Auditors to that effect.