Auto: Higher taxes may lead to substantial drop in demand

Budget Provisions

• 1% Infrastructure cess on vehicles announced 

The announcement says 1% infra cess on small petrol/LPG/CNG cars (till 1200cc), 2.5% tax on sub-4 metre diesel cars till 1500cc.

• Additional 4% tax imposed on higher engine capacity sedans, MPVs and SUVs.
  

• In addition to the Infrastructure Cess, there will be 1% Luxury Tax on cars above Rs 10 lacs.

While increase in taxes on luxury cars will not have any effect on the demand as it is a niche segment, some impact could be felt in the compact car segment. Typically, it's the common man who opts for such cars. They could perhaps defer their buying decision. 

• Skill development institutes to provide skilled workforce

Under the Pradhan Mantri Kaushal VikasYojana (PMKVY), 1500 multi skill training institutes will be set up for which Rs. 1700 crore have been set aside. This would address the grievance from OEMs and auto component makers to certain extent of not getting enough skilled workers.

• Higher allocation for roads & highways to benefit

An allocation of Rs. 55,000 crore in the Budget for Roads and Highways has been proposed which will be further topped up by additional Rs. 15,000 crore to be raised by NHAI through bonds. The total investment in the road sector including PMGSY allocation would be 97,000 crore during 2016-17.  Total outlay for infrastructure to be Rs 2,21,246 crore.

•  Amendments in the Motor Vehicles Act to open up the road transport sector in the passenger segment.

Budget Impact

Union Budget 2016 it seems has proved to be a mixed bag for the automotive industry. While there has been a significant focus on bettering the road infrastructure across the country which might benefit the auto industry, the additonal taxation on cars will impact the impact the growth of automotive industry.

Additional 2.5-3.5% cess is expected to further pull down demand for diesel cars, SUVs currently 40% of total passenger vehicle demand.

Impact of the cess levy will be that Cars will set to be priced higher. Prices of small petrol cars will be hiked from Rs 3000 to Rs 6000 (Alto, Wagon R, Grand i10, EtiosLiva, Ford Figo). Swift Diesel will get Price hike of Rs 15000 to Ford Ecosport Diesel by Rs 25000. Sedan Cars like Honda City will get expensive to tune of 10K on Petrol / Rs 30K on Diesel and SUV Like Mahindra XUV500 will get expensive to tune of Rs 40000 (2.5% Infra Cess + 1% Service Charge). Luxury Cars like Audi Q3, BMW X1 will see price hike of Rs 1.2 Lakh and High End Luxury Cars like BMW 7 Series, Audi A8 will see price hike of Rs 4 - 5 Lakh.

On the miss side, the industry was eagerly awaiting increase in the income tax slab to enhance liquidity in the market as it would have given a little more cash in hand to boost PV/ 2W sales.

 There seem to be some focus on controlling pollution from cars but nothing was introduced for electric and hybrid vehicles.

Also, the Automotive industry had been expecting for a scrappage policy which would also help address the pollution but no major announcement came in the budget.

Commercial Vehicle:

Total outlay for infrastructure in Budget 2016 now stands at Rs. 2,21,246 crore. Out of this, Rs27,000 crore is to be spent on roadways; Rs55,000 crore for roads and highways. Total allocation for road construction, including PMGSY will beRs 97,000 crore. This will provide a big impetus to the overall CV industry.

Two/Three Wheelers:

Positive measures in the agri and infrastructure sector will boost the overall two wheeler demand. Total allocation for agriculture and farmer welfare at Rs 35984 crores to benefit.

Relief to those in rented houses; deduction raised from 24,000 to 60,000 under Section 88G. This may result in a little more money in the pockets of the salaried class and may give impetus to 2W demand.

Passenger Vehicle:

Car & SUV prices to increase substantially due to the levy of infra cesswhich can cause major drop in demand. Increase in outlay for infrastructure will provide comfort to overall PV demand. 

• Union Budget 2016: Complete Coverage

Stock to watch

M&M, Tata Motor, maruti Suzuki, Ashok Leyland, Hero Moto, TVS, Bajaj Auto

Outlook

The budget 2016 has imposed a tax collected at source of 1% on purchase of luxury cars exceeding value of Rs10 lakhs. Further, an Infrastructure cess of 1% on small petrol, LPG, CNG cars, and 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs is proposed. The above measure will have an impact on the price of the cars, and may also impact overall demand.While the aforementioned tax on all passenger vehicles will make them expensive, the Indian automobile Industry sees the allocation of Rs 97,000 crore on infrastructure for roads & highways as a positive move.Special focus on rural infrastructure might help boost rural economy, and could improve the sales of entry-level two-wheelers in rural areas.

Though the taxes announced in the Budget 2016 will affect all the carmakers, the luxury tax on cars above Rs 10 lakh and 4% tax on SUVs, could go against carmakers like Mahindra & Mahindra and Toyota.

There were no announcements on Old vehicle scrappage policy, long term layout for any excise duty cuts. Overall, it’s not a budget the auto industry was anticipating for, so it will be another challenging year for the auto industry

 Pre Budget Expectations

• Roadmap for speedy implementation of GST as the step will be positive for entire auto sector, particularly for CV players given scope for free movement of goods.
• SIAM wants the government to reduce excise duty on large cars and SUVs to 20% from the current rates of up to 30% in the upcoming Budget. The body has asked for 20% excise duty on vehicles that currently have excise duties of 24%, 27% and 30%.
• SIAM had asked for financial incentive to replace vehicles that are over 10/15 years old as this will incentivise replacement. Scrappage policy can extend longevity of over 25% growth over 3-4 years.
• The industry had asked for increased allocation under the scheme for STU procurement of buses to boost CV sales.
• Long-term measures in agri sector should be undertaken to improve farmer productivity/income levels to boost 2W demand.
• Export incentive to promote Make in India as this will benefit the overall manufacturers.
• Focus on infrastructure segment with higher allocation with higher allocation for NHAI, Railways
• Various sops in terms of direct and indirect tax benefits that will increase disposable income in hands of common people.
• Support from Government through reforms and initiatives in taxation and depreciation policy
• A reduction in the bank rates to reduce vehicle loan costs.
• Union Budget 2016: Complete Coverage