Budget 2021: India’s Duty Pinch Threatens To Delay Luxury Car Market Revival

India’s localisation push threatens to delay revival of one of the worst-hit segments of the nation’s auto market.Budget 2021 increased import duty by 5 to 7.5 percentage points on nearly a dozen components including safety glass, ignition wiring sets, electric motors, gas compressors, among others, to boost domestic suppliers. Makers of luxury and premium cars will suffer the most.'A 5% higher duty means that the mass market will have to localise further. But they have the volumes, and they can do it,' said Kavan Mukhtyar, partner and leader of automotive at PWC. For the luxury segment, he said, where volumes are low and companies rely on imported components, local sourcing “becomes even more challenging”.Luxury and premium cars, contributing a tenth of the auto industry’s revenue, are taxed at the highest rate with total levies going up to 100%. And the fourth duty hike on imported parts in the last four years could force the likes of Mercedes Benz India Pvt. to Audi India Pvt. to increase prices a second time in 2021. That would delay a recovery after the pandemic decimated demand and sales tumbled 40% in 2020, data shared by IHS Markit showed..Costlier Fuel Drives Adoption Of Cleaner Cars, And It’s Not EVs.The union budget didn’t offer any relief on taxes and the passenger vehicle market is unlikely to reach the level of even 2018 this fiscal, according to Gurpratap Boparai, managing director at Skoda Auto Volkswagen India Pvt. The duty hike to 15% on certain parts will further increase input costs as some of the specialised components can’t be manufactured locally due to unviable volumes, he said.According to Martin Schwenk, managing director and chief executive officer at Mercedes-Benz India, the rise in auto component duties is unexpected in a revival period. The CEO of India’s largest luxury carmaker didn’t specify by how much prices of the company’s cars will increase.Balbir Singh Dhillon, head of Audi India, said the higher duty on imported parts will have a “cascading effect” on GST, cess and registration costs. “We are evaluating the actual impact on our business before we quantify the hike in our car prices.”.Puneet Gupta, director at IHS Markit, estimates that cars in the segment could become costlier by up to 2%. And that’s after Mercedes-Benz, BMW and Audi have already hiked prices by up to 5% in January due to increase in input costs and depreciating currency..While luxury cars contribute just 1% of the total car sales volume, their share in revenue of the overall auto sector is 10%, according to IHS Markit. The category's growth, however, slowed even prior to the pandemic. Automakers cite high taxation as one of the reasons.The effective tax for the segment is as high as 50% including cess, and it is more than 100% on import of fully built cars. The price of a car built from completely knocked down kits—parts imported separately but assembled in India—is at least 1.5 times the original cost due to taxes, said a senior executive at a luxury carmaker on the condition of anonymity out of business concerns.There’s another challenge—competition from cheaper brands..Premium cars are now increasingly seeing competition from mass-market players that are launching new models loaded with advanced features in the high-end segment and that too at attractive prices, said Gupta.Models including Gloster by MG Motor India Pvt.; Fortuner from Toyota Kirloskar Motor Pvt.; Endeavour by Ford India Pvt.; and Skoda Auto Volkswagen India Pvt.'s Kodiaq and Karoq are offering stiff competition, Gupta said.“While the competition has gone up, luxury carmakers are still grappling with the challenge of frequent policy changes, higher taxes and duties in India,” Gupta said. Policy changes, he said, send a wrong signal to global investors who look for a steady road map.Dhillon of Audi India reiterated the industry’s demand for lower taxes. “We continue to urge the government and the GST Council to rationalise the whole tax structure, which will eventually lead to higher volumes and revenues for the state.”

Budget 2021: India’s Duty Pinch Threatens To Delay Luxury Car Market Revival

India’s localisation push threatens to delay revival of one of the worst-hit segments of the nation’s auto market.

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