A more rational tax classification of vehicles can drive up auto sales

With another Budget round the corner, the auto industry is looking for a dramatic policy move that would end its woes. Although the Budget this time cannot tinker with GST rates or the compensation cess, the sector is nevertheless looking for some form of budgetary relief. There are some possibilities in this regard. The Finance Minister could urge the GST Council to review the basic rate and compensation cess framework for vehicles (without compromising on revenues), especially at a time when the government is keen on promoting cleaner vehicles through the imposition of BS VI fuel emission norms from April 1, 2020, as well as giving a push to electric vehicles. Vehicles are taxed based on length, ground clearance, engine type and displacement. This does not help promote reduction in emissions or encourage technological advancement. The draft National Automotive Policy put out in February 2018 sought to replace the current system of classification of vehicles for taxation purposes with a system based on vehicle length and carbon dioxide emissions. Therefore, all small cars need not be taxed less just because of their size and all large cars need not necessarily attract the maximum GST rate and cess. Such criteria will also help companies and buyers navigate the price increase due to BS VI changeover, as large cars and SUVs, especially the ones that run on diesel engines, are expected to bear the brunt of the price hike.

While personal vehicles seem to have put the worst behind them, the same cannot be said for commercial vehicles. The slowdown in truck sales which began in November 2018 remains unrelenting. Average freight rates in key routes across the country are down 14 per cent since then and monthly fleet utilisation has plummeted 30-35 per cent, according to data from IFTRT (Indian Foundation for Transport Research and Training). The key point here is that this segment has been affected by both structural and cyclical factors. A decrease in turnaround time of trucks after GST eased inter-State movement, while the higher freight loading capacity of vehicles following the revised axle load norms have dampened new truck sales. According to CRISIL estimates, the latter has resulted in an increase in the freight capacity of the entire population of trucks operational in India by 20-25 per cent, equivalent to three years of incremental freight demand. The time is ripe for the introduction of the scrappage policy for commercial vehicles, which will serve the twin purposes of reviving demand and reducing pollution. Revenue loss from providing scrappage incentives can be made good by higher sales volumes as well as improved realisations from the costlier BS VI trucks.

However, the sector needs to look beyond Budget sops to ensure long-term growth. It needs to right-size and right-price its offerings and get ahead of the technology curve, in the policy and consumer-driven shift towards cleaner technologies.

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