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  1. Budget 2016: What is the impact on Automotive industry

Budget 2016: What is the impact on Automotive industry

The Union Budget 2016 presented by Finance Minister Arun Jaitley has sparked strong reactions from the automotive industry, particularly from the passenger vehicles manufacturers.

By: | New Delhi | Published: March 8, 2016 8:45 PM
Budget 2016: The new taxes are likely to have a noxious effect on the Indian automobile industry. (PTI)

Budget 2016: The new taxes are likely to have a noxious effect on the Indian automobile industry. (PTI)

The Union Budget 2016 presented by Finance Minister Arun Jaitley has sparked strong reactions from the automotive industry, particularly from the passenger vehicles manufacturers. The budget mainly concentrates on investment in rural India as well as infrastructure development. It has allocated Rs 970 billion over the next fiscal year on improving and building new roads and highways.

The government has also introduced a new tax on cars sales aimed at fighting high levels of air pollution and congestion. Indeed India has some of the most polluted cities in the world such as Delhi, which is even more polluted than Beijing. However, soon after the temporary ban of sales of large diesel cars in Delhi by the Supreme Court, the new tax represents further disappointment for vehicle manufacturers as they were expecting much more from the Union Budget 2016.

This infrastructure cess levies a 1 percent tax on passenger cars – less than 4 meters long and with engines smaller than 1,200cc – which only run on petrol, compressed natural gas or liquefied petroleum gas. In addition, small diesel cars less than 4 meters in length with engines below 1,500cc will be taxed at 2,5 percent while bigger diesel cars will levy an infrastructure cess of 4 percent. Surprisingly, the government did not impose any taxes on two- and three-wheelers, which may bring a rise in demand for these types of vehicles. The finance minister has also introduced a ‘luxury tax to collect tax at source at the rate of 1% on purchase of luxury cars exceeding value of Rs 10 lakh.” Moreover, the customs duty on commercial vehicles will increase from 10 to 40 percent.

The new taxes are likely to have a noxious effect on the Indian automobile industry. It should be reminded that the automobile sector is a key contributor to Indian economy, accounting for at least 40 percent of the country’s manufacturing GDP. Vinod Dasari, President of the Society of Indian Automobile Manufacturers (SIAM), said that the new Union budget is a “mixed bag” for the Indian automobile industry. Indeed according to experts, the sector may experience a negative short-to-mid term impact; however, the rural development will generate stability as the market dynamic evolves and the purchase capacity of people in those sectors increase. Electric, hybrid, and hydrogen fuel-celled vehicles were not further taxed. Nevertheless, according to Shekar Viswanathan, Vice Chairman and Whole Time Director of Toyota Kirloskar Motor, “We would have expected some measures to promote alternate fuel technologies which would have helped the environment also. We would encourage the government not to just think based on size of the vehicle which has no relation to the technology.”

Instead of infrastructure cess and luxury tax, automobile manufacturers were expecting new fiscal measures to support and accelerate the industry such as reduction in excise duties, introduction of a scrappage policy, and introduction of Goods and Services Tax (GST). To cover these new levies, automobile manufacturers have to increase the price of the vehicles subject to infra cess. As such Maruti Suzuki India Limited (MSIL) announced that the price of their models would go up in the range of Rs 1,441-34,494. Honda Cars India has also announced an increase of prices in a range of Rs 4,000 to Rs 80,000 for the mainstream models while prices are likely to go up to Rs 4-5 lakh for luxury cars.

Roland Folger, CEO of Mercedes-Benz India stated: “the introduction of additional duties and taxes in this year’s Union Budget has adversely affected our pricing. On top, the steady rise of input costs against the backdrop of a weakening Indian currency has further eroded our bottom-line. We were hence left with no option but to make some necessary price adjustments to our product range”. The 3-5 per cent increase of Mercedes Benz India entire model range will take effect from March 15, 2016. Regarding Honda, there will be a price rise ranging from Rs 3000 on small car Eon to Rs 80000 on SUV Santa Fe. According to Rakesh Srivastava, senior vice-president (marketing & sales), Hyundai Motor India Limited (HMIL) “The increase in taxes has come as a big dampener and will further impact demand creating growth challenges especially for SUVs and diesel vehicles. This will necessitate a revisit of business plans.” The increase of prices of some vehicles is likely to have a negative effect on the overall demand in the automobile market. Consumers’ demand is expected to go up until April when the infra cess will take effect, and then gradually decrease.

(By Santanu Kumar, Editor, India Transport Portal)

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