[GTO]

In the days leading up to the Budget, the PR machinery of car manufacturers was busy asking for tax concessions, vehicle scrappage schemes and more. "Keep dreaming", the Government said. No one at the center paid attention to their demands. The Government of India proved again that it views cars as big ticket items that it will tax the heck out of. After the FM's session was over, car manufacturers would rather have been ignored, as they were in 2015.

The 2016 Budget was mostly positive for the overall economy (including rural India), and there's also ~100,000 crore for road development through 2016-17. The FM stated that 85% of stuck road projects are back in action. However, the Budget left the auto industry sweating. Here's all you need to know:

• Cars have just gotten more expensive! This is over and above the price hikes that auto manufacturers rolled out in the new year. Effective immediately is a new 'infrastructure cess'. Citing pollution & traffic concerns, the FM has imposed an infrastructure cess of:
  1% on sub-4 meter petrol, LPG & CNG cars with an engine <1.2 liters
  2.5% on sub-4 meter diesel cars with an engine <1.5 liters
  4% on all other cars (i.e. bigger cars & SUVs)
  
  Please note that the above cess is ONLY applicable on factory dispatches from today. Thus, if your dealer tries to increase the price of a car that's already on his lot or in transit, tell him to take a hike.
  
  Categories of vehicles exempt from this infrastructure cess include 3-wheelers, electric vehicles, hybrid vehicles, hydrogen fuel-cell vehicles, taxis, cars for the physically challenged and ambulances.

• From June 2016 onward, an additional 1% tax will be collected at the source (i.e. dealership) on all cars costing over Rs. 10 lakh. This is TCS (tax collected at source). If you are a tax-paying citizen (which you should be), the 1% TCS shouldn't make much of a difference as it will be credited back to you at the time of filing your income taxes. Dealerships will collect the tax, deposit it with the government and hand over a TCS certificate to you. This practice widens the tax base as there are a lot of evaders who buy million rupee cars, but don't file their returns!
  
  Important to mention that manufacturers who have priced their best-selling variants at Rs. 9.95 lakhs (or in the whereabouts) stand to gain from the post-budget scenario. We can fully expect repositioned middle variants of popular sedans & SUVs.

[GTO]

The Price Impact:

The 1% infrastructure cess won't make much of a difference to the petrol hatchback segment. Think of a price impact of Rs. 3,000 on an Alto (or less than the cost of two tanks of fuel). The Swift petrol? Between Rs. 5,000 - 6,500.

The higher cess on small diesels makes the price difference between petrol & diesel hatchbacks / compact sedans wider by 1.5%. The 2.5% infrastructure cess makes your Grand i10 diesel pricier by ~15,000 rupees, while the fully-loaded Elite i20 diesel is now more expensive by about ~20,000 rupees.

It's cars over 4 meters in length or engines bigger than 1.2L P / 1.5L D that will see a greater impact. The Etios petrol, Maruti Ertiga, VW Vento, Mahindra Thar and gang just saw their prices shoot up by 4%. On a Rs. 9 lakh Skoda Rapid, the tag is heavier by Rs. 36,000.

Any car over 10 lakhs is usually over 4 meters in length and / or has bigger engines. These cars will attract not only the 4% infrastructure cess, but even the 1% TCS (tax collected at source). Again, remember that the TCS will be credited back to you at the time of paying your income taxes. Still, the net 5% hike means that your outflow for a Honda City has increased by Rs. 50,000. The same for an XUV500 AWD AT is a lakh! Eyeing a C-Class? Be prepared to shell out about 1.5 - 2 lakhs more at the time of purchase. An E-Class? Between 2.5 - 3.0 lakhs. S-Class? You probably won't bother with such small details.

Logistical Challenges:

While I personally support the 1% 'luxury car TCS', I'm not entirely convinced if it's a good idea to deposit the advance tax with the dealer. It does raise a number of concerns. For one, dealers are known for their carelessness and you should be prepared to follow up frequently with their accounting departments (for your TCS certificate). Then, considering how many organisations default on paying TDS, service tax etc., what happens if the dealership delays / doesn't deposit the tax with the government? It's just a logistical nightmare. Imagine what will happen if a customer pays the TCS amount to a loss-making dealership, who in turn uses that to pay salaries / other expenses and then shuts down? It would have been preferred if the car buyer could himself pay the TCS online and produce the certificate before the car goes for registration. Online tax payments today have a simple procedure that anyone can follow!

[GTO]

Other Highlights of the 2016 Budget:

• 2-wheeler manufacturers will be very pleased. No increase in taxes for them, while a stronger rural economy only means greater demand for their products.

• The FM said that private players will be permitted to enter the road transport sector. This could mean private companies operating public transport buses, thereby improving the overall competitiveness & efficiency of the sector. Further, the end of 'permit raj' where bus operators have to procure a permit for each route they ply on is welcomed. With the blessings of individual states, private bus operators could freely run on inter & intra state routes.

• The service tax rate will increase from 14.50% to 15% (new Krishi Kalyan cess of 0.5%). Servicing your car at an authorised dealer just got slightly more expensive.

• 200 crore grant for FAME & NATRiP (more info).

• No fresh round of incentives for EVs & Hybrids. This is strange as the Government otherwise seems so concerned about pollution. On the positive side, EVs, Hybrids & Hydrogen cars have been exempted from the new infrastructure cess. The FM has also continued the concessionary taxation regime for electric vehicles. The Nil basic customs duty and 6% excise / CVD regime on specific parts of electric and hybrid vehicles has been extended beyond 31st March 2016 (which is when it was expiring).

• Customs duty on the raw material used for catalytic converters has been reduced from 7.5% to 5%. However, the customs duty on the import of aluminium, aluminium products & zinc alloys has been increased.

• The incentives / weighted tax deduction on R&D expenses has been reduced from 200% to 150% from 1st April, 2017. It will further drop to 100% from 1st April, 2020. This isn't cool - R&D should be supported in every possible way.

• The import duty on golf carts goes up from 10% to 60%.

While the rest of the auto industry started whining, Dr. Pawan Goenka - Executive Director, M&M - aptly summed it up .

“The Budget places strong emphasis on agriculture, rural economy, infrastructure and the social sector. This is what I was hoping for. The resurgence and thrust on the PPP in infrastructure is most welcome. I also appreciate laying down some very clear goal posts on farm income and on village electrification. Perhaps more could have been done for the financial sector and taxation, though staying with the FRBM target was an unexpected bold move and perhaps does put some spending constraints on the Government.

On the face of it, imposing upto 4% Cess for Passenger vehicles is a concern for the auto industry. However, one has to take it in stride, in view of all the priorities that we have for our economy and we in the industry have to manage it. Would have been good if some of the additional revenue from this cess was used to phase out older vehicles.”

[GTO]

Thread moved from the Assembly Line to the Indian Car Scene!

[troublemaker]

I believe, one of the most important thing now is 'what is considered hybrid'. All the manufacturers will try to add some "required" hybrid technology to work around this cess.

[GKMahajan]

Dear GTO,

Great summarizing!
I had tried to understand these points in the online writeups by many - but this takes the cake.

What do you think - will some of the car manufacturers reduce their prices marginally to change tax categories (where ever possible) OR will they stick to their figures OR will they increase their basic rates (due to overall increase of taxes)????

I was considering one out of TUV / Scorpio / XUV - automatic in May or June 2016. The gap between these has suddenly gone up! I will have to re-evaluate the VFM.

Rated 5 stars - I had no choice!

Regards,

Girish Mahajan

[GTO]

Originally Posted by GKMahajan

I had tried to understand these points in the online writeups by many - but this takes the cake.

Thanks!

What do you think - will some of the car manufacturers reduce their prices marginally to change tax categories (where ever possible) OR will they stick to their figures OR will they increase their basic rates (due to overall increase of taxes)

Couple of thoughts on that.

1. There is absolutely no room for over-pricing in the 10+ lakh segment now. Cars have to be perfectly priced. Any new launches will be priced aggressively.

2. We'll see a lot of sub-10 lakh variants now. Even those that are currently priced at 10.25 lakhs (as an example) might be repositioned.

3. Some manufacturers who have the margins & want to keep up the sales momentum might split the hike with the customer by offering some discounts. The Scorpio is a prime candidate (but not the overbooked Creta).

Originally Posted by troublemaker

I believe, one of the most important thing now is 'what is considered hybrid'. All the manufacturers will try to add some "required" hybrid technology to work around this cess.

Completely agreed! The Government has no clue and thus, even extremely mild hybrids like Maruti's SHVS get away with concessions.

[Axe77]

Originally Posted by GTO

Categories of vehicles exempt from this infrastructure cess include 3-wheelers, electric vehicles, hybrid vehicles, hydrogen fuel-cell vehicles, taxis, cars for the physically challenged and ambulances.

Do I again see Maruti smiling at the loophole for diesel cars like Ertiga, Ciaz etc that slip-in claiming micro hybrid benefits. I say "slip-in" because honestly I perceive cars like Prius, Reva and Camry as genuine hybrids with Ertiga, Ciaz etc really only checking the technical box on this front.

[GKMahajan]

Originally Posted by GTO

2. We'll see a lot of sub-10 lakh variants now. Even those that are currently priced at 10.25 lakhs (as an example) might be repositioned.

3. Some manufacturers who have the margins & want to keep up the sales momentum might split the hike with the customer by offering some discounts. The Scorpio is a prime candidate (but not the overbooked Creta).

Thanks for the prompt response.
Do you think MM will reduce the prices of Scorpio or XUV ATs?

Girish Mahajan

[Ketz]

As i see, the 2016 budget is a mixed bag for auto industry.

Negatives- The tax and duty hikes, all of which are discussed and detailed above. Given the increase in prices, the demand will be definitely impacted in the short term.

Positives- (Yes there are positives as well ) With the impetus of spending on rural sector, eventually the spending will translate into re-kickstart the rural economy which would bode well for auto demand. Add to that the infrastructure spending which would result in more & better roads, which would also spur up the demand. But the positives are more medium to long term than immediate.

[@Chaand]

Great thread GTO. All in one for all to see.

Originally Posted by GKMahajan

Do you think MM will reduce the prices of Scorpio or XUV ATs?

I don't think they have a choice. M&M were the first to launch the 24xx cc diesels after the 2.5 and above varieties were banned following the HC ruling.
M&M has their finger on the pulse of the Indian market and they may respond real quick.

All in all, doesn't this make the pre-owned market more lucrative all of a sudden? The price between a pre owned C/D segment car vs its new one has leap frogged!

[drsingh]

Originally Posted by Axe77

Do I again see Maruti smiling at the loophole for diesel cars like Ertiga, Ciaz etc that slip-in claiming micro hybrid benefits. I say "slip-in" because honestly I perceive cars like Prius, Reva and Camry as genuine hybrids with Ertiga, Ciaz etc really only checking the technical box on this front.

Maruti is smiling. And so are Maruti's lobbyists.

[engine_charan]

Thanks GTO for this amazing thread. Yesterday, I was reading all the online blogs and not able understand how it will be converted in real time taxes. After going through your thread, it took me only 5 minutes to understand the budget 2016 effect on auto industry. So, Maruti is smart in introducing the SVHS in Ciaz and Ertiga, I think they will introduce it in all Maruti Diesel cars like Swift, Baleno and upcoming Vitara Brezaa.
I am thinking Mahindra will be introducing mini-hybrid in Scorpio, XUV 5OO and TUV 300 to avail tax benefits. Remember they were very quick to adapt the ground clearance rule in XUV 5OO and the recent ban on diesel cars of 2 litre or more in Delhi.

[BoneCollector]

Thanks a lot GTO. This has cleared a lot of confusing stuff I had in my mind post the budget. Now I've to look at the pricing of Brezza. Will Maruti reduce prices of S-Cross 1.3 Alpha to sub 10L or keep Brezza top end below 10L?

I won't be surprised if Maruti comes out with SHVS of all its models.

[rrsteer]

Originally Posted by GTO

While the rest of the auto industry started whining, Dr. Pawan Goenka - Executive Director, M&M - aptly summed it up .

Sir he had reasons to not whine

Here is a question from Mahindra Auto Quotient quiz competition- Which automobile company stands to gain most from a thriving rural economy?

Hint : it is the largest tractor manufacturer, largest small commercial vehicle manufacturer, largest manufacturer of SUVs ( majority of volume coming from rural/ semi urban demand)