Budget 2016 adversely affects passenger vehicles

By: | Updated: February 29, 2016 8:18 PM

Outlining the government’s focus on rural and overall infrastructure development, Finance Minister Arun Jaitley announced that Rs 19,000 crore will be allocated towards Pradhan Mantri Gram Sadak Yojana (PMGSY) which is a substantial increase from Rs 9,805 crore allocated in 2013-14.

Arun Jaitley announced a 1% tax-at-source on cars exceeding sticker price of Rs 10 lakh. (PTI)Budget 2016: Arun Jaitley announced a 1% tax-at-source on cars exceeding sticker price of Rs 10 lakh. (PTI)

Outlining the government’s focus on rural and overall infrastructure development, Finance Minister Arun Jaitley announced that Rs 19,000 crore will be allocated towards Pradhan Mantri Gram Sadak Yojana (PMGSY) which is a substantial increase from Rs 9,805 crore allocated in 2013-14. The total expenditure on PMGSY, together with the States’ contribution towards the project, will be to the tune of Rs 27,000 crore. The 100Km/day construction rate is going to be ‘substantially stepped up’ to achieve the goal of connecting 65,000 eligible habitations by constructing 2.23 lakh kilometre of roads by 2019 — the target itself being advanced by two years from its previous target of 2021.

Rs 55,000 crore is being allocated to roads and highways, while an additional Rs 15,000 crore will be raised by National Highways Association of India (NHAI) through bonds. Cumulatively, the contribution from PMGSY and funds allocated to roads and highways, the total investment in the road sector gets spiked to Rs 97,000 crore in 2016-17. Another crucial announcement was to encourage private sector participation in public transport sector which will allow private players to operate buses that will in-turn enhance the public transport efficiency.

While the announcements central to infrastructural development are positive, the more direct implication on the automotive industry comes from the additional tax burden levied on cars across the segments.

Arun Jaitley announced a 1% tax-at-source on cars exceeding sticker price of Rs 10 lakh. A tax of 1% was also announced on all petrol/CNG/LPG powered cars which are under 4 metres in length and run on sub-1200cc engines. Diesel cars continue to get punished. A 2.5% tax on sub-compact (under 4 metres in length) diesel vehicles with engine capacity not exceeding 1500cc is particularly harsh and there’s a 4% tax on bigger sedans and SUVs with higher engine capacity — most likely 2-litres and above in displacement.

It wasn’t long ago when the floodgates were opened for ‘dieselisation’ of India which translated to huge sales of diesel-powered vehicles as consumers were lured by the relatively sizeable savings at filling stations — especially if the monthly running was above a certain threshold. So, it’s rather ironic that the fuel that led to great gains for the economy and growth of the industrial sector is at the receiving end already and has enjoyed a relatively short romance with the consumers.

The additional tax burden on cars also comes in at a time when the entire automotive industry is already in the process of big expenditures on R&D and technological advances to comply with the BS6 emission norms which is expected to be put into effect by 2019-20.

 

India is one of the most dynamic automotive markets and the industry has shown immense opportunity and growth prospect. If the RBI doesn’t bring down the interest rates, the different taxes levied across the spectrum of passenger cars will result in a market and economic slowdown as an immediate reactive impulse of consumers. Over mid-to-long term, however, the market dynamic will evolve and should stabilise as the rural sector grows owing to the massive benefits announced in the budget and demand, coupled with purchase capacity of people grows. The two-wheeler industry should see continued growth as the budget impacted passenger vehicle segment in isolation and two-wheelers remained unaffected.

The budget states that EVs, hybrid vehicles, and hydrogen fuel-celled vehicles are exempt from any kind of cess, but there also wasn’t any specific stress to promote ‘Green’ vehicles — something that the industrial establishment hasn’t appreciated as it was expecting a clear long-term clarity on National Electric Mobility Mission Plan (NEMMP) which wasn’t delivered either.

The immediate impact on the automotive industry will be heavily on the negative slant, and if the RBI, as mentioned earlier, doesn’t reduce direct interest rates, the market will feel the heat and burden for some time to come.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition