Budget 2011: Excise hike likely to make cars, durables costlier

Companies making cars, fast moving consumer goods (FMCG) and durables have been on tenterhooks since the government indicated a complete rollback of stimulus, including a 2% hike in excise duty.

A hike in excise rate will mean prices of automobiles and other consumer goods will dart up proportionately as producers, who are hemmed in by rising input costs, will have little option but to pass it on partially or fully.

“If the stimulus package is rolled back and excise duty increased, it will have to be passed on to the consumer,” said Mayank Pareek, executive officer (marketing and sales), Maruti Suzuki India.

Car sales had held firm despite a partial rollback of the stimulus package last year. However, the situation this time around is different, said Pareek.
“Fuel prices have increased by 17% till now this fiscal and financing rates have also been going up, rising by 23% till now. Even if auto finance rates haven’t risen as sharply, a customer’s total interest outgo on other things such as home loan EMIs has increased, thereby impacting sentiment,” he said.
An increase in excise outgo would hit car makers hard since the last few months have also seen a steep increase in input costs.

While the industry has passed on a part of this increase to consumers, it has had to absorb a good part because of competitive pressures.

As of now, small cars which are less than 4 metres in length and have engine displacement of up to 1200cc petrol or 1500cc diesel, are charged 10% excise duty, and more powerful ones 22%. Cars more than 2000cc have to pay Rs15,000 over and above the 22% excise levy.

There is no clarity on whether the stimulus rollback would also affect two-wheelers, though bike makers say any increase in excise payout will automatically raise end prices and thus hurt demand.

Their refrain: two-wheelers should not be taxed more as they are a mode of transport for the common man.

When the stimulus package was first announced in 2008, excise duty on two-wheelers was reduced to 8% from 12%. Last year, when there was a partial stimulus rollback, two-wheelers came into the 10% bracket.
A top official with a bike maker said finance rates for two-wheelers are far more than for cars — banks and finance companies charge 22-23% per year on bikes and scooters against 11-12% on cars. Besides, unlike car financing, two-wheeler financing is concentrated with two or three big financiers after big names withdrew from two-wheeler financing 2-3 years back.

The auto industry, accounts for almost a fifth of the government’s excise kitty, feels a rollback will hurt growth.

In April-January, car sales jumped 23.4% year on year, while bike sales rose 25.4%. Sales of commercial vehicles have also been on the rise.

The story is no different for consumer durables companies, which have started hiking prices of washing machines, air-conditioners and refrigerators by 5-15% in a bid to pass on the increase in the cost of raw materials.

LG Electronics India for one has raised the prices of air-conditioners 8-9% and washing-machines and refrigerators 6-7%, said Yasho V Verma, chief operating officer.

The durables makers say further hikes would have to be effected to pass on any increase in excise duty, given that their margins are already thin, and this could impact the industry’s strong double-digit growth.

“We have so far restrained from taking price hikes, but if the excise duty goes up, we will be forced to pass it on to consumers,” said Manish Sharma, head of marketing, Panasonic India.

The FMCG sector is also worried about a hike in excise duty, given the margin pressures, particularly on account of rising raw material costs, which have forced most players to hike product prices in recent months.
Currently, categories like packaged water and biscuits are charged 8% and 4% excise duty, respectively, while categories like sanitary napkins and confectionery attract 10% excise. The industry is seeking full exemption or a reduction in the levies.
All consumer companies, from FMCG to retail, are looking forward to implementation of the goods and services tax (GST), which will mean uniform tax rates and help bring down product costs, boosting consumer off-take and volume growth.
Any increase in excise duty on fuel is also likely to take air travel beyond the reach of many people. As such, aviation turbine fuel prices have also been on the rise and most full-cost carriers have already increased fuel surcharge to pass on the hike to customers.

Typically, fuel costs contribute around 40% to an airline’s total expenses. Thus, any increase in excise duty on fuel could mean another jump in fuel surcharge, said an analyst from a domestic brokerage firm.

Typically, excise duty and service tax are set on a par — 10% at present.
If service tax is increased, international air travel in premium class could go up, said Saloni Roy, partner, Ernst& Young. “Domestic (both premier and economy) and economy class on international routes have fixed rates at `100 per ticket and `500 per ticket respectively, which may not be impacted by a change in rate, unless these amounts are also revised.”

“Undoubtedly, any increase in service tax will reflect on the final ticket as it is part of the airfare (on premium international travel),” said a spokesperson for Air India.