The Annual Budget 2012-13 has been tabled in the parliament and is widely believed to move and shake the country’s automobile sector in a humungous manner. Even though this year’s budget saw a cut in personal income tax across various slabs, Finance Minister Pranab Mukherjee has also announced a rise in excise and import duty on certain products. More than a stimulus, this budget is expected to hobble the Indian automobile segment due to the across the board increase in excise duty that will push up prices further. However, the silver lining is that finance minister has not announced extra tax for diesel vehicles to offset the fuel, which will come as a big relief for both car makers as well as car buyers.
Here are the highlights of the Union Budget that will affect the auto sector:
* Basic excise duty has been hiked across the spectrum from 10pc to 12pc. This move will increase prices of small cars (under 4 metres) and two wheelers.
* Large cars to attract upto 27pc duty. That means excise duty on cars measuring above 4 metres in length has been increased from 22pc to 24pc. Furthermore, excise duty on mixed group vehicles like MUVs and SUVs has been changed from 22pc +Rs. 15,000 to a flat 27pc.
* In order to encourage more local production, all Completely Built Unit (CBU) imported cars costing over US$ 40,000 will see a big hike in excise duty, from 60pc to 75pc. This means luxury carmakers like BMW, Audi, Mercedes, etc are the worst affected.
* No imposition imposed of excise duty on parts imported into the country for manufacturing hybrid and electric vehicles. This is in line with the government’s policy of encouraging low polluting vehicles.
* Customs duty on bicycles and parts has been jacked up.
In a nutshell, the union budget 2012-13 is in the right directions by rationalising the excise duty and service tax structure and it is trusted that public sector oil companies shall be given due liberty to fix diesel prices on the market based mechanism in the coming weeks of the next fiscal.
Dr Pawan Goenka, president, M&M (Auto and FES) said, “Specific to automotive industry, the industry is relieved that the FM did not take any retrograde step like imposing a tax on diesel vehicles. The excise duty hike was in a way expected and we will have to pass on the price increase to the consumer. However, with all the surcharges and special levies, the top excise duty rate is as high of 29pc. I believe this is simply too high! For Mahindra vehicles, the price increase would be as low as Rs. 3,000 to a maximum of Rs. 35,000 depending on the product category. On the tractor side, service tax and excise duty hike will also increase overall input cost and therefore an immediate increase of Rs. 3,000 – 5,000 is expected. We expect some short term negative impact on demand but with time we think it will wear off.”
Lowell Paddock, president & MD, General Motors India, noted, “It is a populist budget. Having said this, focus on infrastructure, education, skill development, agriculture, irrigation and health care is encouraging news. But the corporate sector expected at least retention of the existing excise tax structure for the growth of the auto sector as it started slowing down during the last one year due to high interest rates, fuel prices, commodity prices, negative market sentiments etc. As far as the automotive industry is concerned, it did not meet the expectations. The industry did not expect any increase in excise duty on passenger cars. In fact, the industry expected the government to announce some other measures to fuel demand of vehicles which have also not happened. This was essential as the automotive industry makes a significant contribution to the growth of the economy which continues to remain sluggish.” He added, “Some of the other announcements made by the finance minister for the manufacturing sector, R&D activities, hybrid vehicles, skill development, etc should help enhance the competitiveness of Indian industry and generate employment opportunities. Similarly the concessions announced for environment friendly vehicles should help promote usage of green technology. These proposals, if implemented effectively, should have a positive impact on the industry and the economy as a whole going forward. The challenge now is the implementation of the key economy boosting proposals announced in the budget. Our hope is that the market will respond favorably.”
Michael Boneham, President and Managing Director, Ford India commented, “One of the clear takeaways from the Union Budget 2012-13 is the impetus it will provide to infrastructure development, with its focus on improvements in areas like the power sector and road network development. The stimulus to social sector is progressive and a welcome step towards development of the economy. We are also pleased with the Government’s decision about not levying extra tax on diesel vehicles as any additional tax would have been a regressive step. However the announcement of a 2 per cent increase in excise duty is disappointing and not favorable towards the auto industry. This will lead to increase in prices of our products and will have negative impact on consumer confidence. The increase in excise duty for large cars up to 27pc (ad valorem) is again not favorable though we are assessing its full impact on our product portfolio.”
Vipin Sondhi, MD & CEO, JCB India Ltd. mentioned, “While one has to study the Budget in detail, my initial reaction is that it is inflationary and excise-related proposals would push up prices. However, certain initiatives like liberalising the External Commercial Borrowing (ECB) rules and boost to investment particularly in infrastructure sector, Relief in indirect taxes to sectors under stress; viz. infrastructure, manufacturing, mining, roads,…get duty relief are few positive signals. Also outlay for Infrastructure of Rs. 50 lakh crore in 12thPlan, is another step towards growth with encouragement to the private sector”
Michael Perschke, Head, Audi India, who has given a rating of 6/10 to the budget said, "The increase in excise and customs duty on large cars in this budget is very surprising. This increase comes at a time when the Indian automotive industry was finding favour with customers looking for better and efficient cars. We may now need to re-evaluate our pricing strategy in India. However we do welcome the positive announcements on increase of investments in infrastructure and encouragement to private investment which should drive higher growth in the economy. The revision and reduction of personal tax slabs will result in increased savings and possibly higher spends. The GDP growth forecast of 7.6pc for next financial year also augurs well for the country and we expect India to remain one of the most vibrant consumer markets.
While Tata Motors has already decided to increase the prices of its commercial vehicles and passenger vehicles, with immediate effect, proportionate to the increase in the corresponding excise, others are following suit.
Indian Foundation of Transport Research and Training says:
The Tax Proposals relating to Road Transport / Automotive Industry in the Union Budget 2012-13 have been on predictable lines because the partial withdrawal of fiscal stimulus given to Industry during 2008-09 in the wake of global economic meltdown was very much on the cards, particularly when the commercial vehicle manufacturing, tyre manufacturing and commercial road transport business since October 2009 has been witnessing robust growth in all respects. The vehicle makers, tyre producers and goods transport firms have been able to pass on the price increases in their products / services with comfortable ease i.e. October 2009 – February 2012 period. The Commercial Vehicle prices in this period have already gone up by 12%-14% and truck freight by 35%-40% on trunk routes.
2.Excise Duty on vehicles : The 2% increase in Excise Duty from 10%-12% shall broadly impact the light commercial vehicles (LCV) cost by Rs.12,000/- - Rs.15,000/-, intermediate commercial vehicles (ICV) by Rs. 20,000/- - Rs.22,000/-, medium commercial vehicles (MCV) by Rs.28,000/- - Rs.35,000/-, multi-axle vehicles (MAV) by Rs.37,000/- - Rs.45,000/- and multi-axle trailers (MAT) by Rs. 40,000/- - Rs.50,000/-. In case of Building of commercial vehicle bodies is currently exempt from excise duty. In lieu of this duty, a specific rate of `10,000 is being charged on chassis in addition to the applicable ad valorem duty. This duty structure has been found to be regressive and Finance Bill has proposed to convert the specific component of duty to an ad valorem rate of 3 per cent. Therefore, effectively the direct impact on the buses in addition to increase in the basic excise duty as stated above shall at least add upto Rs.20,000/- for LCVs, Rs.28,000/- - Rs.30,000/- for ICVs, Rs. 45,000/- - Rs.50,000/- for MCVs and Rs.60,000/- - Rs.65,000/- for MAVs
3. Excise Duty on Tyres: The increase of Excise Duty in the Union Budget by 2% in case of tyres and tubes shall make a pair of truck / bus tyres costlier by Rs.550/- - Rs.600/-, light trucks by Rs.350/- - Rs.380/-, a SUVs tyre costlier by Rs.75/- - Rs.120/-, a popular passenger car tyre (wagon – R, Hyndai Santro, Indica etc.) to be costlier by Rs. 50/- - Rs.60/-. In last 2 years, the tyre prices have gone up by over 25%-30% and tyre makers by and large have retained the benefit of fiscal stimulus given by the Centre Government in 2008-09.
4. Service Tax : The Service Tax on Transportation of goods by road has been revised to 12% from 10% in the Union Budget, however the government already has given 75% rebate on the levy of service tax on gross freight and therefore for all practical purpose the service tax on goods transport agency services has just gone up from 2.5% (75% of 10% rate) to 3.0 % (75% of 12% rate). in last 11 quarters since October 2009, the truck freight has gone up by 35% - 40% across the country and market has absorbed the freight increases in this period and hence, 0.5% increase in service tax for goods road transport in the present buoyant market shall also be absorbed by the trade. It is expected that in Order to bring uniformity and equity among various modes of goods transport, the rail freight in the next fiscal too shall be brought at par with road transport in terms of levy of service tax. Already in the first week of March 2012 the Rail freight has been raised by 15%-20% and earlier in October 2011 too the rail freight was revised upward by the Railways. This only confirm that if freight hike can be passed on to consignors then why not service tax on rail freight be implemented now.
5. Fuel Price - Diesel subsidy : the goods transport operators by way of freight increases have been able to pass on the regular increases in capital cost of trucks, auto finance cost, tyre price, TOLL, motor insurance premium, road tax / permit fee, crew cost extra and these fixed and variable inputs of road transport are under no price regulation or intervention. Than, why should the diesel prices should be regulated and subsidise is highly unreasonable to the fuel pricing policy of the country. This is high time that diesel price should be deregulated, though in a phased manner, so that road transporters are not unduly protected in the name of checking inflammation. The union budget should have immediately withdrawn the unwarranted subsidy on diesel price in the overall interest of the country’s economy.
In the nut shell, the union budget 2012-13 is in the right directions by rationalizing the excise duty and service tax structure and it is trusted that public sector oil companies shall be given due liberty to fix diesel prices on the market based mechanism in the coming weeks of the next fiscal.