Vehicle Scrappage policy: Tax rebate of up to 25% on new cars

Currently, there are 51 lakh vehicles in India which are older than 20 years, 34 lakh vehicles more than 15 years old and 17 lakh older than 15 years, without renewed fitness certificate.

By:Updated: Mar 31, 2021 8:14 AM


Buyers of new passenger and commercial vehicles could get concession on road tax at the rates of up to 25% and 15%, respectively, from October 1 against scrapping certificate for their old vehicles, as per a draft notification released by the ministry of road transport and highways. Though the prompt release of the draft showed the Centre’s keenness to roll out the policy announced recently, state governments’ concurrence is crucial for its implementation. Road tax rebate is one among the many incentives for scrapping of ‘old’ vehicles envisaged in the policy, requiring giveaways by the Centre, states and the automobile manufactures. Road transport is in the Constitution’s concurrent list and road taxes are appropriated by the states; these are levied typically at 10-14% of the vehicle price.

As per the draft, the road tax concession will be for a period of eight years for commercial vehicles, and 15 years for passenger vehicles from the date of registration. Under the proposed policy, all personal vehicles will have to undergo mandatory fitness test after 20 years to ply on the roads while commercial vehicles will have to pass the test after completion of 15 years. On failure to obtain the fitness certificate, the vehicle would be impounded by the transport authorities, declaring that it as ‘end of life vehicle’.

Currently, there are 51 lakh vehicles in India which are older than 20 years, 34 lakh vehicles more than 15 years old and 17 lakh older than 15 years, without renewed fitness certificate. Such vehicles are seen to pollute air 10-12 times more compared to vehicles that are fit, besides being unsafe for use. A carrot-and-stick approach is proposed under the policy, whereby scrapping of ‘old vehicles’ (those that passed the thresholds mentioned above) will be promoted with assorted incentives: apart form the rad tax rebate, scrap value at 4-6% of ex-showroom price of new vehicle, 5% discount on purchase of new vehicles and waiver of registration fee for new vehicle purchased on scrapped vehicles are proposed.

Also, there are disincentives and penalties for non-compliance: Hike in registration and fitness certificate renewal fees, stiff penalties for delay in renewals, green tax by states, and, of course, mandatory automated fitness test and de-registration for the old vehicles failing to pass the mandatory fitness test. Nomura has estimated the incremental benefit from the government for those who comply with the policy to be around ~2-3% of the new vehicle’s price. The agency wrote: “Also, a 5% likely discount by OEMs for new cars on scraping old vehicles seems high, in our view, as most OEMs make ~10% margin. Furthermore, ‘green tax’ of ~1-3% of the vehicle price will be applicable upon renewal, further raising the holding cost of old vehicles”.

According to Nomura, offering 5% discount for scrapping unfit vehicles ‘seems undesirable to industry participants and the industry might agree to only ~1% discount. While unveiling the policy, road transport and highways minister Nitin Gadkari said: “The Voluntary Vehicle Fleet Modernisation Programme will enable the Indian auto industry to take its turnover to Rs 10 lakh crore (in a few years) from Rs 4.5 lakh crore at present… availability of scrapped material will reduce the cost of auto components by 30-40%.”

Of course, if fitness and its registration certificates are renewed, a private vehicle can ply on the roads even after 20 years of first registration and a commercial vehicle beyond 15 years. However, increased fitness fees and re-registration charges would act as a deterrent for an owner to retain old vehicle.

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