GST cut needed to make the scrappage policy work

By: |
March 20, 2021 6:00 AM

Given the impact on the environment, both the Centre & states must help encourage users to scrap their vehicles

Gadkari has said that he has requested finance minister Nirmala Sithraman as well as the state governments to consider the issue in the GST Council.Gadkari has said that he has requested finance minister Nirmala Sithraman as well as the state governments to consider the issue in the GST Council.

Given the obvious environmental benefits, apart from the massive stimulus to the domestic automobile industry, road transport and highways minister Nitin Gadkari has done well to announce the terms of the scrappage policy for vehicles above a certain age. Aged vehicles, as his ministry points out, are likely to pollute 10-12 times as much as fit vehicles. And while the numbers differ from model to model, and manufacturer to manufacturer, a new car is probably 50-60% more fuel efficient than a 15-20-year-old car one; in which case, the scrappage policy will also result in a lot more fuel saving for the economy and will also contribute to lowering the economy’s carbon footprint. Given the advances in technology such as in the use of lighter and improved materials, air bags, side-impact beams, ABS brake systems, etc, road safety will also improve once the scrappage policy is implemented in earnest. There are, according to the road ministry’s estimates, 51 lakh light motor vehicles that are older than 20 years, another 34 lakh in the 15-20 year bracket, and there are 17 lakh medium and heavy commercial vehicles that are over 15 years old and do not have a valid fitness certificate.

How well the policy will work, of course, will depend on the amount of incentives being offered. According to the draft policy, owners of to-be-scrapped vehicles can hope to get around 4-6% of the value of the replacement vehicle as scrap compensation and possibly a 5% rebate on the new vehicle once the scrappage certificate is produced. These are, of course, advisories and it is not certain that manufacturers will, in fact, agree to offer such discounts; given the large volumes of new vehicles they can sell if the scrappage policy goes through, though, doing so seems sensible.

Another advisory that will be sent will be to state governments who will be asked to give up to 25% of the road tax as a rebate in the case of personal vehicles and 15% in the case of commercial vehicles; whether they will remains to be seen as this is a big source of revenue for them but, as in the case of automobile manufacturers, the lure here will be the large number of new registrations that will result from the scrappage policy. So, if all goes to plan, those scrapping their vehicles can hope to get about 10% off on the price of a new car; road taxes are typically 4-5% of the cost of a car. Add to this the benefits of lower maintenance in a new vehicle as well as lower fuel expenditure and, the ministry feels, this could be a winning proposition.

Whether this will be enough is not clear, but one way to estimate what vehicle owners would want is to look at prices in the used vehicles market as these take into account the differences in fuel consumption, depreciation, etc. For most models, a 15-year-old used car fetches around 15-20% of the price of a new model; in which case, it is possible that a 10% incentive will not be enough to make vehicle owners make the switch. Therefore, a cut in GST rates may be required to tilt the balance. Gadkari has said that he has requested finance minister Nirmala Sithraman as well as the state governments to consider the issue in the GST Council. While the Council may be loath to make a cut in GST rates, as in the case of the automobile manufacturers, the significantly higher volume of vehicles on which GST—albeit at a lower rate—can be collected should act as an incentive.

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