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Customer LoginsSame-Day Analysis: Passenger vehicles set to become more expensive in India as government proposes tax increase
A cash-strapped Indian government is sidelining the automotive industry's demands for a scrappage policy and cheaper loans, as the budget is set to make passenger vehicles more expensive through tax increases.
IHS Automotive Perspective
- Significance: Passenger vehicles (PV) are set to become dearer in India as the government has proposed to increase taxes on vehicles in the union (federal) budget, for the financial year starting April.
- Implications: While the direct measures involving the automotive industry are hardly positive, the indirect measures included a major push on infrastructure.
- Outlook: From the perspective of the automotive industry, the direct measures are certainly not positive. Nevertheless, the government's focus on the infrastructure sector is likely to boost demand of medium and heavy commercial vehicles.
Passenger vehicles (PV) are scheduled to become dearer in India as the government has proposed to increase taxes on vehicles in the union (federal) budget for the financial year starting April, which has been presented by the finance minister today (29 February). In his second budget, Finance Minister Arun Jaitley said his ministry is proposing a new levy, called the infrastructure cess (tax), on passenger vehicles.
A cess of 1% has been proposed on vehicles with a length not exceeding 4 metres and engine capacity not exceeding 1.2 litres. This includes vehicles powered by gasoline (petrol), liquefied petroleum gas (LPG), or compressed natural gas (CNG). Diesel-driven motor vehicles under 4 metres in length and with an engine capacity less than 1.5 litres will attract a cess of 2.5%, while higher-engine-capacity sport utility vehicles (SUVs) and sedans will attract a tax rate of 4%.
Among the vehicles exempted from this cess are three-wheeled vehicles, electrically operated vehicles, hybrid vehicles, hydrogen vehicles based on fuel-cell technology, cars for physically handicapped persons, and motor vehicles cleared as ambulances or registered for use solely as an ambulance. Motor vehicles which after clearance have been registered for use solely as a taxi will also be exempt from the new cess.
The finance minister also proposed "to collect tax at source at the rate of 1% on purchases of luxury cars exceeding a value of INR1 million (USD14,521) and purchases of goods and services in cash exceeding INR200,000".
While the direct measures involving the automotive industry are hardly positive, the indirect measures include a major push on infrastructure. The central government has proposed to allocate INR970 billion for the roads sector. This includes INR190 billion for rural roads under the Pradhanmantri Gram Sadak Yojna, a nationwide plan to provide good all-weather roads to villages. For the next fiscal year, the government has also allocated 1.22 trillion for the development of 160 non-functional airports across the country.
Outlook and implications
Finance Minister Jaitley's budget speech steered cleared of popular steps and stayed rooted to the government's policy of fiscal discipline. As such, it was no surprise that the government did not give in to the industry's demands for a lowering of interest rates on vehicles, a reduction in excise duty on vehicles, and the introduction of a scrappage policy to stimulate demand, among others. With fiscal prudence as the top priority, the government's hands are evidently tied as implementation of the recommendations of the seventh pay commission for public-sector employees is going to put a considerable strain on the Treasury. This effectively means the absence of any regulatory or fiscal support to the passenger vehicle industry, which is showing signs of faltering growth after a solid year.
From the perspective of the automotive industry, the direct measures are certainly not positive and are expected to put pressure on passenger vehicle demand. Nevertheless, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government, which is considered business-friendly, has succeeded in making reasonable allocations for pressing demands such as stress in rural parts of the country, while not neglecting the enormous infrastructure investment requirements in India. The focus on the infrastructure sector is likely to act as a demand generator for medium and heavy commercial vehicles (MHCVs).
Meanwhile, there was little on the structural reforms front, including the goods and services tax (GST). The tax reform, considered the biggest in India's nearly 70 years history as an independent nation, has been automotive industry's biggest demand from the government. The tax reform found a mention in the minister's speech but the government failed to provide a roadmap for the reform, which is facing stiff political opposition.
IHS Automotive expects light-vehicle sales in India to expand 10.3% to 3.4 million units this year, while sales of MHCVs are expected to decline 3.7% to nearly 330,300 units as a result of last year's high base.
About this article
The above article is from IHS Automotive Same-Day Analysis of automotive news, events and trends, and is a deliverable of the World Markets Automotive Service. The service averages thirty stories per day and also provides competitor and country intelligence. Get a free trial.