Auto industry expects GST cut, scrappage policy, other incentives from the Budget

Finance minister Nirmala Sitharaman’s second Budget is crucial for the slowdown-hit auto industry, which reported its worst-ever sales drop in two decades last year. The auto industry which contributes more than 7% to the country’s gross domestic product (GDP) is in the grip of a slowdown due to various reasons, including increasing cost of ownership, fuel price volatility, the transition to stricter Bharat Stage VI norms, uncertainty over electric vehicles, and rising insurance costs.

In December, the industry’s wholesale number fell 13.08% over a year to 1,405,776 units; overall production also declined by 5.22%. In such a scenario, industry experts believe this year’s Budget can be instrumental in boosting demand and consumer sentiment.

As of now, the major challenges facing the industry are the higher overall cost of ownership, the price increase due to BS VI transition, the liquidity crunch arising from the NBFCs crisis, and low consumer demand.

The Society of Indian Automobile Manufacturers (SIAM) believes that one of the ways to revive the industry is a reduction in GST (goods and services tax) rates. “Increased cost of BS VI may affect demand, hence, we have also requested the government to reduce the GST rates for BSVI vehicles effective April 1 from 28% to 18%,” says Rajan Wadhera, president of the industry body.

The industry also called for a cut in the personal income tax rate, which will mean more disposable income in the hands of consumers, eventually leading to automotive demand recovery.

The Automotive Component Manufacturers Association (ACMA), another industry body which represents over 850 companies in the auto component sector, also reiterated the need for a uniform18% GST rate on all auto components. “Given the sector is challenged due to the prolonged slowdown, the industry association recommended, supportive measures that would enable the revival of automotive growth and a smooth transition to the next phase in the year to come,” it said.

ACMA president Deepak Jain said the economic slowdown has impacted domestic demand in the auto sector. “We hope that the forthcoming Budget will help uplift both the consumer and industry sentiments,” he said.

Another factor that can help boost demand, according to industry experts, is the long-awaited scrappage policy. The industry has sought an incentive-based scrappage policy and an increase in re-registration charges of vehicles for a long time.

“We have urged the finance ministry to consider announcing an incentive-based scrappage policy and also increase Budget allocation for ICE bus procurement by state transport undertakings,” Wadhera added.

SIAM recommends that incentives can be given in the form of a 50% reduction in GST and a 50% reduction in road tax and registration charges. This move may discourage the use of old vehicles and can be an important factor in reviving consumer demand.

“We would like the Budget to spur demand without putting any additional burden on the government exchequer. One way to achieve this is by realising the scrappage policy for all old vehicles, the draft policy of which has been shared by the government. The auto industry is willing to share its portion towards realising such scrappage policy, which will eventually have a more sustainable impact on the environment,” says Naveen Soni, senior vice president, sales and services, Toyota Kirloskar Motor.

The industry also believes income tax benefits for electric cars will help boost the market sentiment. “This kind of stimulus will not have a significant impact on the government revenues in the immediate future while it can effectively improve consumer sentiment and help pull forward demand during the difficult period of BS VI transition, which will see prices of most vehicles go up. These purely temporary measures could help lead a phased improvement in the overall sentiments and revival of demand,” Soni added.

The industry has also recommended the abolishment of the customs duty of 5% on lithium-ion (Li-ion) cells to boost battery manufacturing in India.

“As India marches to become a global hotspot for electric mobility, a critical step in that direction is recognising battery swapping as a viable charging mechanism for two-wheelers and three-wheelers,” said a spokesperson from Ola Mobility Institute.

He said that it will require policy interventions, including battery swapping in FAME-II, treating electric vehicles and batteries as separate entities, and extending demand incentives for both, reduction of GST on Li-ion batteries and earmarking funds for R&D to develop batteries locally.

In her maiden Budget last year, Sitharaman had announced an income tax deduction of ₹1.5 lakh on loans for electric vehicles to incentivise their purchase. The industry expects similar incentives on February 1 this year.