Incentivise Vehicle Scrapping: Clarify on green cess , offer GST cuts on replacements

By: |
February 4, 2021 5:30 AM

Any scrappage policy of the government has to remove such policy confusion.

Finance minister Nirmala Sitharaman saying in her Budget speech that scrapping of old vehicles will be voluntary, and personal vehicles will be allowed to run after 20 years with fitness certification from automated fitness centres, would likely indicate a more people-friendly scrappage policy—currently, the rules require a renewal of registration after 15 years, after due fitness tests. Failing the test, a vehicle won’t be eligible for renewal of registration, though the government is yet to notify a scrappage policy. Also, following the NGT order of 2015, all petrol vehicles older than 15 years and diesel vehicles older than 10 have been banned in the national capital. However, how good or bad the scrapping policy will eventually prove needs to be read against the cost of scrapping, the size of the incentives for scrappage and the fine print in relation to the applicability of green levies on old vehicles.

To be sure, planning for vehicle scrapping is good from an environmental perspective—a 2018 report of the ministry of road transport and highways said vehicles manufactured before 2000 account for 15% of the total vehicular pollution in India (despite their low numbers) because these emit 10-25 times the pollutants that modern vehicles do. But any such move was always worrying because of the huge costs involved and unclear incentives to vehicle owners.

Also, while it is welcome that vehicles can be allowed to ply after 15 years subject to a fitness test, if green cesses are too high—or if the fitness testing is too cumbersome—that may make it difficult for such vehicles to be used. Any scrappage policy of the government has to remove such policy confusion. Indeed, if 2-3 crore vehicles are to be discarded by 2025 under the end-of-life indicated by the Budget, the government will need to offer generous incentives, say, large tax-cuts for purchase of replacements; currently, cars under 1,200 cc are taxed at 1% cess plus 18% GST, while 1,200-1,500 cc ones attract 3% cess plus 18 GST and above-1,500 cc ones attract 15% cess and 28% GST.

Lack of scrapping wherewithal is also a major concern; while a report by HDFC Bank cited by The Economic Times estimates that the vehicle scrappage and recycling market potential at $6 billion if a scrappage policy is put in place, progress on this has been slow—the draft guidelines on scrapping and the setting up of authorised vehicle scrapping facilities were released in October 2019, but haven’t been finalised since. And, it is not even clear that India has the capacity to replace 2-3 crore vehicles that will need to be junked if they don’t clear the fitness tests.

A transition to electric vehicles, which the government has been keen on, will need far larger incentives than those being given right now, apart from creating the requisite support infrastructure. While it is good that the government is open to drawing a distinction between old and polluting, it would do better if it were to implement a scrapping policy in a graded manner, starting with commercial vehicles and using data on how much of the pollution load is attributable to each class of vehicles.

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