Budget 2016: Infrastructure cess makes carmakers whine

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March 01, 2016 1:02 AM

Budget 2016: In what came as bad news for car buyers and manufacturers, prices are set to go up, ranging from Rs 2,000 on mass market vehicles to over Rs 1 lakh on big diesel SUVs and sedans.

Budget 2016: In what came as bad news for car buyers and manufacturers, prices are set to go up, ranging from Rs 2,000 on mass market vehicles to over Rs 1 lakh on big diesel SUVs and sedans. This is because the Budget has levied an infrastructure cess of up to 4% on vehicles of varying engine and fuel types. On small petrol, LNG and CNG cars of up to 1,200cc, the cess stands at 1%. It is at 2.5% on diesel cars powered by engines of up to 1,500cc and at 4% on larger cars, including sedans and sports utility vehicles. Further, a tax at source of 1% on luxury cars worth above Rs 10 lakh has been levied.

According to industry estimates, the rise in prices due to the cess could range from Rs 2,500 on entry-level small cars such as Maruti Alto and Tata Nano to over Rs 1 lakh on high-end vehicles priced above Rs 30 lakh.

While finance minister Arun Jaitley justified the levy on passenger vehicles saying that “the pollution and traffic situation in Indian cities is a matter of concern”, industry players believe the pollution and traffic issue has been only party addressed. The industry is disappointed as the cess comes at a time when demand is soft and patchy.

Mahindra & Mahindra executive director Pawan Goenka said it would have been good if some of the additional revenue from the cess was used to phase out older vehicles. Voicing a similar concern, Maruti Suzuki India chief financial officer Ajay Seth said the cess “will affect consumption in an already stressed environment”.

On the face of it, imposing up to 4% cess for passenger vehicles is a concern for the auto industry. However, one has to take it in one’s stride in view of all the priorities that we have for the economy,” Goenka said.

Toyota Kirloskar Motor, another major player in the utility vehicle segment that will attract 4% cess, said the government’s thinking should not be determined solely by the size of the vehicle. “We would encourage the government not to just think based on the size of the vehicle which has no relation to technology. Taking older vehicles off the road should be its priority,” Shekar Viswanathan, vice-chairman and whole-time director, Toyota Kirloskar Motor, said.

M&M and Toyota have been the most impacted since the issue of pollution came into focus in December last year with an interim ban being placed on sale of vehicles of over 2,000 cc capacity. The automobile industry has argued that contrary to popular belief, cars are not the highest contributors to air pollution.

Foreign players operating in the country too expressed disappointment with the government’s decision to impose an additional cess on passenger vehicles. Nigel Harris, president and managing director, Ford India, said the Budget lacked a roadmap for the automotive sector. “Instead of introducing policies for issues like excise duty rationalisation and vehicle modernisation, the Budget has levied additional taxes that will be detrimental to sales and growth prospects for the industry,” he said. Roland Folger, managing director & CEO, Mercedes-Benz India, said taxing luxury cars would deter the growth of the industry. “In the short- to mid-term, we missed an opportunity to drive growth in the sector, which could have further helped the long-term prospects of the auto industry,” Folger said.

Analysts too felt that the opportunity could have been used to phase out older vehicles from Indian roads. “While larger cars and SUVs have been taxed, the way in which polluting old vehicles will be taken off the roads has not been addressed. To that extent, the issue of pollution is only partly addressed,” Kumar Kandaswami, partner, Deloitte India, said. The automobile industry has been demanding and expecting a scrappage policy for older vehicles.

German luxury car-maker Audi, the second-largest player in the luxury car market in the country, also said the Budget negatively impacts the automobile industry. “We are disappointed that the industry’s demand on reducing excise duty has not been addressed. On the contrary, the infra cess has been added which will further affect prices and consequently demand. Also, we need to evaluate the impact of an extra tax levy of 1% on purchase of cars worth above Rs 10 Lakh,” Joe King, head, Audi India said.

As far as excise duties are concerned, small cars that are less than four metres in length attract excise duty of 12.5% while cars more than four metres in length but with engine capacity of less than 1,500 cc attract a duty of 24%. Vehicles with engine capacity of more than 1,500 cc are charged an excise duty of 27% while those with ground clearance of more than 170 mm attract an excise duty of 30%.

The Budget has exempted electric and hybrid vehicles from the cess. Last year, the government had introduced the FAME-India (Faster Adoption and Manufacturing of Hybrid and Electric vehicles) scheme as part of the National Electric Mobility Mission Plan. The scheme envisages support of Rs 795 crore in the first two fiscals starting 2015-16.

Cess Pool

1% on sub-4m petrol/CNG/LPG vehicles with engine of up to 1,200 cc

2.5% on sub-4m diesel vehicles with engine of up to 1,500cc

4% on vehicles over 4m in length and/or with engines of over 1,500cc

Exemptions: Electric and Hybrid Vehicles; vehicles registered solely for taxi use; vehicles registered solely for use as ambulance; cars for physically handicapped persons

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