The dust hadn’t even settled after a magnified focus on the Indian automotive industry, thanks to the Supreme Court ruling that banned sale of diesel vehicles with engine capacity of 2-litres and above and Arvind Kejriwal’s odd-even rule, that the buzz around cars is back! The union budget by Finance Minister Arun Jaitley has attracted harsh reactions from the automotive industry — passenger vehicles manufacturers in particular.
There will be an infrastructure cess of 1% levied on petrol, CNG and LPG cars which run on sub-1,200cc engines and do not exceed 4 metres in length. Cars that cost 10 lakh and above will be subject to tax collection at the rate of 1% at source (TCS). The TCS isn’t expected to have a direct impact on the price of cars, but surely have a tangential impact on demand.
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Gaurav Talvar from Felix Advisory explains TCS saying, “Under the current Indian Income Tax Act, how tax collected at source works is that, the seller, at the time of selling the prescribed goods, shall collect from the buyer, additional amount towards the buyer’s advance income tax, as tax collected at source. The amount so collected, is referred as tax collected at source, which the seller is required to deposit with the tax authorities. The buyer on the other hand, will be eligible to take credit of tax so collected at source, against her/ his income tax liability for the said year. Thus, in effect, the tax collected at source, is not a levy on the sale price, but an advance collection of income tax. Thus, in effect, it would not have an impact on the price, but can have an impact on the overall demand. The measure is primarily aimed at increasing transparency and controlling black money.”
In my view, the biggest negative for the passenger vehicle segment announced in this budget is the 2.5% infrastructure cess on sub-compact (less than 4-metres in length) diesel cars that have engine capacity not exceeding 1,500cc. The 4% cess on big cars and SUVs — the definition of which is still quite unclear — may sound quite severe but the market share by volume of such cars is relatively minute in comparison to the mass segment of cars that’ll be affected by the 2.5% cess burden on small diesels.
Ironically, diesel, which has been at the nucleus of negative impacts lately, was the buzzword not too far back in time when there was a great government impetus on ‘dieselisation’ of India, and sale of diesel passenger vehicles went sky rocketing.
The auto industry is under pressure to fast-track its technology climb to achieve compatibility with BS6 emissions level which will come in effect towards the turn of the decade, and manufacturers are spending big on R&D. The additional tax burden on passenger vehicles across the spectrum is a pinch that the industry could’ve done without. Electric, hybrid, and hydrogen fuel-celled vehicles have been kept exempted additional taxes, but there also wasn’t any announcement to push the case for ‘Green’ vehicles.
The immediate impact on the automotive industry from a passenger vehicle standpoint is in the red, and all expectations are now on RBI to balance the negative impact by reducing taxes.
While the additional taxes on passenger cars (especially the popular mass segment) may be a contrasting hue to the ‘business friendly’ image of the BJP-led NDA government, the FM did announce great benefits and investments in the rural sector for overall development. The auto industry may experience a negative short-to-mid term impact, but the rural development will ultimately yield stability over long-term as the market dynamic evolves and the purchase capacity of people in those sectors go up. Interestingly, the finance minister didn’t apply any tax burdens to two-wheelers which, coupled to the expected rural development, should bring a healthy spike in two-wheeler demand.
Allocation of Rs 19,000 crore towards Pradhan Mantri Gram Sadak Yojana (PMGSY) — which is a substantial increase from Rs 9,805 crore allocated in 2013-14 — outlines the government’s intent of rural and overall infrastructure development. Rs 27,000 crore will be the total expenditure on road and highway development — a cumulative figure of PMGSY allocation, together with the States’ contribution towards the project. The government is also going to step up road construction, which is currently going at a rate of 100Km/day, to finish about 2.23 lakh kilometre of roads by 2019.
On a parallel note, there will be a dedicated allocation to the tune of Rs 55,000 crore under the Budget for Roads and Highways, while National Highways Association of India (NHAI) will raise additional Rs 15,000 crore through bonds. The collective contribution from PMGSY and funds allocated to roads and highways, spikes up the investment figure to Rs 97,000 crore in 2016-17 in the road-infra sector.
There was an unexpected announcement that surely would bring cheer to the commercial sector players. The government announced private sector participation in public transport sector — a move that will enable private players to operate buses for masses that will consequently enhance the public transport efficiency.
That said, there were great expectations from the ‘industry-friendly’ government to announce fiscal measures to support and accelerate the auto sector like reduction in excise duties, introduction of a scrappage policy, and introduction of Goods and Services Tax (GST). Credit to the government to concentrate on infrastructural development of the nation, but the beneficial effects of the weighty outlay for roads will be seen only over a long-term duration and the auto industry should’ve been allowed some of the expected measures mentioned above for immediate gains and growth.