Budget 2012 makes cars costlier

Cars in India have just turned dearer, following today’s Budget 2012-13 proposals, announced by finance minister Pranab Mukherjee. His proposal to raise standard excise duty on small cars from 10 percent to 12 percent hikes their sticker price and is effectively a rollback from the excise duty cut in 2008 (to 8 percent) and then in 2010 (to 10 percent). Those cuts were essentially to assist domestic carmakers address the adverse impact of the massive global economic crisis in 2008.

The automotive industry has been fast to react. A few hours after the Budget, carmakers like Maruti Suzuki, Mahindra & Mahindra and Tata Motors had indicated that they would be hiking prices immediately, passing on the increase to the end-customer.

Large cars (longer than 4000mm and with engine displacement of 1500cc or above for diesel and 1200cc for petrol) also bear the brunt of higher tax, the excise duty on them increasing from 22 percent to 24 percent. For cars (over 2000cc) that attract excise duty of 22 percent and an additional Rs15,000 per vehicle, the finance minister plans to switch over to an ad valorem rate of 27 percent.

That’s not all. The import duty on Completely Built Units (CBUs), whose pricing exceeds US$40,000 (Rs 20 lakh) has been substantially increased from 60 percent to 75 percent. This increase will impact high-end premium cars from Mercedes-Benz, BMW, Audi, Volvo, Porsche and of course the Ferraris and Lamborghinis.

One sector which has been spared a hike is ‘green’ vehicles. The finance minister said, “Specified parts required for the manufacture of hybrid vehicles enjoy full exemption from basic customs duty and special CVD with concessional excise duty/ CVD of 6 percent. This concession is being extended to specified additional items and lithium ion batteries imported for the manufacture of battery packs for supply to electric or hybrid vehicle manufacturers.”

Comments on the Budget from industry captains have started flowing in: Here are the first ones. More opinions follow in subsequent Budget updates on this website.



S Sandilya, president of the Society of Indian Automobile Manufacturers (SIAM): “The overall two percent excise duty hike on cars is a withdrawal of the stimulus. We were expecting it in some form or the other but hoping that it will not happen. However, the government was under some compulsion on account of the fiscal deficit, so it had to do something about it. In terms of large cars, our expectations were that the finance minister would bring down duty and match it with other cars, which did not happen. The increase from 22 to 24% and also making it ad valorem was avoidable.”

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Lowell Paddock, president and managing director of General Motors India: “It’s a mixed bag. We are pleased with the infrastructure investments that will benefit us in the long term. But in the near term, the excise duty increase is the single biggest concern and will have an impact on our expectations from the market. We will have to assess what this means in terms of large cars and certainly we will have to look at how we pass it to the consumers.

As regards small cars, the excise duty increase from 10 to 12 percent is a disappointment. Since the bulk of our sales are in the small car segment, we will have to analyse their pricing in the near future -- I don’t think we have a choice when it comes to passing the price increase to the customer. And the raising of the customs duty on high-end cars (which are imported in CBU form) from 60 to 75 percent is a good step because it will promote local manufacturing and also give a boost to the local component industry.

Some of the other announcements made by the finance minister for the manufacturing sector -- R&D activities, hybrid vehicles, and skill development should help enhance the competitiveness of Indian industry and generate employment opportunities.Similarly, the concessions announced for environment-friendly vehicles should help promote usage of green technology. These proposals, if implemented effectively, should have a positive impact on the industry and the economy as a whole going forward.”

SHOBHA MATHUR