The concessional lower excise duty on cars, motor cycles and small commercial vehicles is likely to get a further extension as part of the Narendra Modi government’s efforts to revive the manufacturing sector. The move will act as a significant fillip for automakers who are yet to see any significant improvement in sales.
The sop, as per an announcement in Budget FY15, is to expire by December 31.
“Car sales are down. The government could extend tax relief to the auto sector beyond December 31,” said a source in the government.
If extended, small cars, scooters, motor cycles and commercial vehicles will continue to attract 8% excise duty, mid-segment cars will bear
20% duty, while sports utility vehicles (SUVs) and large cars will attract 24% duty.
These products were bearing four to six percentage points higher duty prior to February 17, 2014 when the tax was slashed by the previous UPA regime for a period up to June 30. In the last week of June, finance minister Arun Jaitley announced an extension up to this year end.
The minister said then that continuation of the concessional duty would benefit the economy and therefore the revenue loss in the short term could be made up in the long term. The government expected the car makers to pass on the benefit of duty concessions to consumers and show positive growth response in the subsequent months.
Most carmakers, however, did not cut prices across the board but chose to give record discounts on select low-selling models. They also passed on the duty cut benefit by way of delaying their impending price increase decisions in the hope of an increase in demand. This strategy helped them preserve margins.
Passenger vehicle sales, which includes cars, utility vehicles and vans, had recovered in May this year after the growth fell to over a decade’s low. But after five consecutive months of growth till September, domestic passenger vehicle sales shocked most with a 7.5% year-on-year drop in October to 2.21 lakh units. This was especially disappointing since October was a festival month with both Diwali and the Navratras.
Industry executives now expect car sales to show up to a 5% rise this fiscal (FY15), with a bigger jump coming next year (FY16) as overall economic growth takes a more firm footing and consumer confidence makes a stronger comeback.
The signs are already there in terms of increased footfalls at showrooms, yet converting them to purchases has proved a challenge.
Sumit Sawhney, country chief executive officer and managing director for Renault operations in India, said the industry had welcomed the announcement about six months ago to maintain the reduction in excise duty.
“I think the government should continue to do so going forward as well. Taking a long term view, the government has to have a unified excise duty structure and further reduce the duty. Indian auto industry has been going through a rough patch lately and this move will provide the necessary impetus to the industry,” said Sawhney.