Volkswagen Financial Services- 19 Mar 2018

Budget 2018: Impact on the Auto Sector

As Arun Jaitley began his momentous 2018 Indian Union Budget speech, auto industry mavens around the country listened intently. The first budget, post the landmark Goods and Service Tax implementation was much anticipated by auto manufacturers around the country. While many were expecting a certain easing of the GST rates for certain models, there were others who were looking for a greater push for electric cars. Unfortunately, these were not addressed by the finance minister with the depth that was anticipated by most.

Pricier Import Duty                                                            

For starters, the customs duty on luxury vehicles which aren’t fully manufactured in India but assembled from kits that are made outside the country was raised. This proposal was made to include both cars and bikes which are assembled in India using imported kits. The customs duty on these type of vehicles (CKD, or completely knocked down vehicles) has been hiked from 10 percent to 15 percent, making these vehicles significantly costlier. This increase in customs duty of auto parts, accessories, and CKD components is also clubbed with a 10% Social Welfare Surcharge. Both together have made for pricier imports for luxury car manufacturers.

Most luxury car engines are not manufactured in India. Instead these are usually imported and assembled. This hike directly affects luxury car and bike makers that have set up assembly plants in India. This is also a serious deterrent for car manufacturers that want to break into the Indian market but given this hike, it seems a highly unlikely possibility. This step by the finance minister, according to experts, seems to be taken keeping in mind the $ 43.5 billion domestic auto component industry in India. In the short term, however, it will make cars more expensive as most car makers import components from abroad.

FAME Ignored

FAME, or Faster Adoption and Manufacturing of Electric and Hybrid Vehicles, a scheme that has garnered a lot of eyeballs, was also ignored in the budget. Many consider FAME to be pivotal to the government’s ambitions of going completely electric by 2030. This, however, seems unlikely if the government continues with the current taxation formats for this industry. Many leaders in the electric vehicle segments were keen on checking the GST rates on electric vehicles and electric vehicle batteries. They were left disappointed since there was no mention of the same. There is hope that the electric vehicle policy being formulated will come up as a separate policy in the coming months. The industry is expecting these issues to be dealt with sooner, rather than later.

Corporate Tax Cut

Companies that have a turnover of INR 250 Crores or more will face taxes reduced to 25%. Considering that most car companies function in this bracket, it serves as a positive for most car brands. This tax cut will benefit them; however, it remains to be seen if these benefits will be passed on to the car buyers.

Robust Road Plan

This, while being a highly long-term benefit for the car market, still ranks as a benefit for the auto industry in a budget devoid of too many bright patches. The government, said Mr. Jaitley, planned to build over 9000 kilometers of highways. This will go on to strengthen road-rail connectivity and encourage investments from the private and public sector. This, along with the growth of the infrastructure, will definitely provide a big boost to the economy and the auto manufacturing sector.

Excise Duty Cut on Fuel

Unbranded fuel saw an excise duty cut of INR 2/litre for diesel and petrol. This cut will go a long way in making sure that many around the country don’t see fuel prices as deterrents for buying a luxury vehicle.

All in all, the Union Budget 2018, missed out on addressing some of the primary concerns of the auto industry but it wasn’t all gloomy for the auto sector. There are a number of policies still in play which will take time to implement but stand to benefit the sector greatly in the long run.