Budget 2021

Automobiles: it pays to go green

PARVATHA VARDHINI C | Updated on January 27, 2018


What’s changed

Unlike the widely expected scrappage policy for old vehicles or steps to rationalise excise duties, what the Budget brought for the auto sector is an infrastructure cess on vehicles.

A continuation of duty concessions for certain parts of electric vehicles announced in the previous Budget, a 1 per cent TDS on purchase of ‘luxury’ cars over ₹10 lakh and an announcement to open up road transport in the passenger segment to the private sector were among the other measures announced.

The background

Even as several industries continue to face weak demand, the auto sector has seen pockets of good growth over the past one-two years. So far this fiscal, cars and heavy commercial vehicles (trucks and buses) have shown a strong volume growth of 10 per cent and 30 per cent respectively.

Hence, given the fiscal pressures, the Centre has found a novel way to cash in on the upturn in auto sales to additionally mobilise resources through an infrastructure cess and TDS (tax deduction at source). The 1 per cent cess will impact prices of vehicles beginning right from the humble Nano to popular small cars such as the Alto, Swift, Micra , Beat, i10, etc.

If you are among the ones who prefer diesel cars for its relatively higher mileage the cess is higher at 2.5 per cent.

Diesel variants of cars such as the Figo, Swift, Indica, Indigo CS and Amaze, for example, fall in this category. On all other vehicles, a cess of 4 per cent is applicable. Given the pricing power that the auto industry enjoys, this additional cess will just be passed on to consumers in the form of higher prices. The only ones exempt from this are three-wheelers, electric/hybrid vehicles, vehicles used as taxis or ambulances or cars used by handicapped persons.

Besides, if you are buying a ‘luxury car’ exceeding ₹10 lakh, be prepared to shell out 1 per cent TDS. Like the cess, this is expected to be collected at the time of purchase. Logic extends this provision to SUVs as well. Both these taxation moves may dampen buyer spirits a bit just at a time when urban consumption is looking up.

On the other hand, various welfare measures announced for the rural and agriculture sectors are expected to boost demand for two-wheelers and tractors. In the listed space, companies such as Hero MotoCorp, Bajaj Auto, TVS, Mahindra and Mahindra and Escorts will benefit indirectly from increased disposable incomes in the hands of the rural consumer.

While more details about the opening up of passenger road transport to the private sector are awaited, the move is a fillip for public transport. This will push up demand for buses over the medium to long-term. Ashok Leyland, Eicher and Tata Motors will be the beneficiaries in the listed space. From the commuter point of view, state transport undertakings may also be pressed to provide better service.

The verdict

The higher cess for diesel and bigger vehicles and the luxury car tax show that more polluting or gas guzzling vehicles are no longer going to be left scot free. An indirect pat for clean energy.

Published on February 29, 2016

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