Higher depreciation, reversal of ban on purchases, deferment of registration fee hike announced to boost auto sector

The Finance Minister Nirmala Sitharaman on Friday announced a slew of measures including hiking depreciation benefit on all vehicles from 15 to 30 per cent, deferring a proposed multi-fold increase in registration fee and reversing a five-year old ban on government purchases to provide a boost to the domestic automobile industry, which has been battling an unprecedented and protracted slowdown in the domestic market.

The hike in depreciation benefit will be valid for all vehicles bought between now and March 2020. It is expected to help clear the high inventory build up at dealerships across the country today. At the same time, the lifting of the ban on purchase of new vehicle by government for use in its various ministries and departments, implemented as part of many austerity measures taken in October 2014, is expected to give a one-time short term boost to demand. In addition, the government has also started work on a vehicle scrappage policy, a long standing demand of the industry, but could not announce the exact scheme due to lack of scrapping infrastructure in the country today. FM Sitharaman has also deferred the proposed hike on registration fee of vehicles till June 2020.

The Ministry of Road Transport and Highways, in its recent draft notification issued on July 26, had proposed increasing registration charges on new medium good / passenger vehicles by 20 fold from the current Rs 1,000 to Rs 20,000, on new truck or a bus from Rs 1,500 to Rs 20,000, on new two wheelers from Rs 50 to Rs 1,000 and on new cars from Rs 600 to Rs 5,000.

"I wish to also dispel completely the notion that there will be any tinkering with the period of registration that a vehicle is valid for, for a BS IV emission vehicle," Sitharaman said. "This vehicle will remain on the road for as long as the period of its registration is valid and there will be no revision of that. Further, I also want to assure the industry that alongside electric vehicles, vehicles that run on internal combustion engines will also continue to be registered."

There has been widespread confusion in the domestic market on the future of internal combustion engines due to government's steadfast encouragement of electric vehicles. Many union ministers including minister for road transport and highways Nitin Gadkari and minister for commerce and railways Piyush Goyal and also government's primary think tank Niti Aayog have from time to time talked about banning fossil fuel vehicles in favour of electric vehicles.

Auto majors including market leader R C Bhargava told Sitharaman - in a consultative meeting held with her ten days ago - that the confusion has put off consumers from buying cars today in anticipation of electric vehicles in the near future.

"There is an impression among consumers that a practical affordable electric vehicle is just around the corner. Nothing is further from the truth," Bhargava said. "In reality, an electric car for an individual consumers with enough range and affordable price is at least three years away, if not more. But this impression means some people may have put off their purchasing decision in anticipation of an electric vehicle. This hurts the industry in the short term."

Rajan Wadhera, President, SIAM said that the industry is grateful for the FM's clarification. "The FM has cleared the air on this subject and consumers will no longer hesitate to purchase BS IV vehicles," said Wadhera.

While a widely anticipated cut in GST rate from 28 to 18 per cent sought by the industry was not forthcoming, the announcements on Friday have been welcomed by everybody in the industry. Passenger vehicle sales have declined for nine straight months till July 2019 and in 12 of the last 13 months. It has been the most prolonged spree of monthly sales decline in history.

"The announcements made today are highly appreciated. For automobiles there were three broad reasons for the slowdown - poor sentiment, availability of finance and transaction cost for buying vehicles. The announcement today will go a long way in improving sentiments because it shows the government is listening to the industry," said Pawan Goenka, managing director, Mahindra and Mahindra. "I think the financing concerns are more or less taken care of by the announcements. There is not much for reducing transaction cost but several other measures will incentivise vehicles purchase and also remove some of the unfounded fears such as BS IV vehicle registration. The FM has said there is more to come. A scrappage policy will be a big boost. We will wait and see."  

With the crucial festive season - that accounts for nearly 25 per cent of annual sale of automobiles - around the corner, any uptick in demand due to measures announced today will be particularly helpful to the ancillary segment that has been the worst hit by the slowdown.    

"The announcements made by the FM are indeed very assuring and welcome. We do hope that measures to improve liquidity and deferring of enhanced vehicle registration cost will revive the ailing sales in the auto sector," said  Ram Venkataramani, President, Automotive Component Manufacturers Association. "That apart, enhanced depreciation of 30 per cent until March 2020 will motivate institutional sales of vehicles. Further, removal of ban on purchase of new vehicles by government will also help reduce the current pileup of inventory."

"It is also heartening to note that the government would be announcing scrappage policy in due course. This will not only create replacement demand but will also have a benign impact on the environment and reduce import of fossil fuels. This is as newer vehicles will be endowed with better technology," he added.

"We do hope that the central government in consultation with states will consider ensuring a uniform GST rate of 18 per cent on all auto components. Currently 60 per cent of auto components are at 18 per cent, while the rest are at 28 per cent. A lower rate of GST will not only ensure better compliance but also help curb grey operations in the aftermarket."

Also Read: Nirmala Sitharaman press conference LIVE: Government withdraws surcharge on FPIs announced in Budget 2019

Also Read:FPIs pull out Rs 8,319 crore in August amid global trade tension

Also Read:FPI inflow jumps 13% to Rs 13,111 crore in June: SEBI