Business Today
Budget a disappointment for the auto industry

The industry that was expecting some incentives like fleet modernisation to spur demand, though, remains a disappointed lot.

FM Arun Jaitley

FM Arun Jaitley

The automotive industry is not exactly happy with the budget recommendations that would not just increase vehicle prices, but also curtail demand in the already sluggish domestic market.

The industry that was expecting some incentives like fleet modernisation to spur demand, though, remains a disappointed lot.

The government has imposed an additional 1 per cent tax on purchase of cars exceeding value of Rs 10 lakh, which will be a small deterrent for new cars buyers. As it would be levied at source (meaning dealerships) the burden would be quite high for the customers.

HIGHLIGHTS:Union Budget 2016

If this was not enough for the industry that is struggling to remain on the positive terrain with mere 2.35 per cent growth till January this year, will have to take the additional burden of 1 per cent infrastructure cess of 1 per cent on all small petrol, LPG and CNG cars.

Small diesel cars would be taxed at a higher 2.5 per cent on engines up to 1,500-cc displacement. A much higher 4 per cent impact would be on bigger sedans and SUVs, resulting in an immediate hike in prices across all categories of passenger vehicles.

FULL COVERAGE:Union Budget 2016

"It would hurt the industry. With the government's focus being rationalisation and simplification of taxes, introduction of new taxes on vehicles will only dampen the spirit of the auto sector," Vinod Dasari, President of the apex body of the auto industry, Society of Indian Automobile Manufacturers said.

While there are no specific fiscal measures in the budget to stimulate the auto sector, the only relief for the industry is a grant of Rs 200 crore made under the Faster Adoption and Manufacturing of Hybrid and Electric vehicles (FAME) scheme and the vehicle testing body NATRiP. Also, buses may get a positive streak with a unified national permit scheme likely to help improve the public transport system especially the inter-state. The proposal to have All India National Permit for buses could augment fare reduction and help in new bus sales.

Analysts tracking the industry said that the proposals for cess and new tax collection on vehicles will dampen the spirits in the auto sector. "The new infrastructure cess of 1 to 4 per cent on passenger vehicles, will affect price and consequently the demand cycle. The same holds true for the pollution cess levied on various car models," says Wilfried Aulbur, MD & CEO, India for Automotive Asia at Roland Berger, a global consultancy firm.
The government also plans to reduce the inventive for indigenous R&D on auto. The weighted tax deduction on R&D expense has been reduced from 200 per cent to 150 per cent from April 01, 2017 and it will further go down to 100 per cent from April 01, 2020. "This will go against indigenous R&D in India. Moreover, reduction in tax benefit has been announced without any announcement about corresponding reduction in corporate tax rate," said Mr Dasari.

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