Budget 2016: Putting brakes on auto industry

If you are planning to buy a new car, then get ready to pay more. The government has imposed 'infrastructure cess' of up to 4% on passenger vehicles such as small petrol cars, sports utility vehicles and luxury cars.

"I propose to levy an infrastructure cess, of 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and SUVs," Arun Jaitley said in his Budget speech.

"The pollution and traffic situation in Indian cities is a matter of concern," Jaitley said while justifying the new cess tax.

The move will increase prices of passenger vehicles priced under Rs 10 lakh in the range of Rs 3,000-Rs 50,000. For high-end cars, the price will go up to Rs 3 lakh.

With the infra cess announcement, entire auto index plunged. Shares of Maruti Suzuki India fell by 4.76 % to Rs 3,246.55 — 52-week low on the BSE. While Tata Motors went down by 3.88 % and Mahindra & Mahindra fell by 1%.

Pawan Goenka, executive director of M&M said, "Imposing up to 4% cess for passenger vehicles is a concern for auto industry. However, one has to take it in stride, in view of all the priorities 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."

Once the cess is effective, the average price hike across the Hyundai models will be in the range of Rs 3,000-80,000. The company will increase price of its entry level Eon by Rs 3,000. While Creta will turn expensive by Rs 26,000.

Rakesh Srivastava, senior vice president, Hyundai Motor India said, "The increase in taxes has come as a dampener and sustaining growth momentum will be a big challenge."

Currently, total tax rate on small cars is 30%; on large cars it's 42 % and for SUVs, 51 %.

Guillaume Sicard, president of Nissan India, said, "We do not foresee that to be a major burden for small car buyers, but the luxury cars and SUVs will feel the heat."

In addition to this, Jaitley also proposed 1% tax to be deducted at source on purchase of luxury cars over Rs 10 lakh.

Vinod Dasari, president of Society of Indian Automobile Manufacturers (SIAM), said, "An additional 1% tax to be collected at source on purchase of cars exceeding value of Rs 10 lakh will be a deterrent. We believe this would result in the rise of prices across categories of passenger vehicles and would hurt the industry. With the government's focus being rationalisation and simplification of taxes, introduction of new taxes on vehicles will only dampen the spirit of the auto sector."

However, the Budget did not address the need for additional incentives like 'scrappage incentive schemes' for environment-friendly hybrid and fuel cell vehicles.

This will certainly increase the growth challenges auto industry has seen in last few months. In December, the Supreme Court had banned sale of diesel vehicles with engine capacity of 2,000 cc and above in Delhi-NCR region. The ban is in place till March 31.