Customs duty hike on car parts may put brakes on luxury car sales

New Delhi: Increases in customs duty on some imported engine components and completely knocked down (CKD) units are set to put a brake on the surging sales of luxury cars.

Audi India, which had forecast double-digit growth this year, now expects sales in the year to be little changed over 2017.

Vikram Pawah, president of BMW India, said sales would have grown faster had it not been for the sudden increase in taxes, which will force the company to raise prices from April.

And, according to India’s largest luxury car maker Mercedes-Benz, their cars will get dearer by 3% to 5%.

According to Rahil Ansari, head of Audi India, the firm was initially looking at double-digit sales growth this year, but is now expecting a flat year.

“Increase in custom duty has definitely affected prices again, which will dampen customer sentiment. The market had started to stabilize after the introduction of GST (goods and services tax) but the increase in cess has negated any benefits and the decision in the Union budget will make the business more unfavourable,” said Ansari in response to a query.

Audi sold 7,876 units in 2017, an increase of 2% from a year ago.

Sales at BMW India Pvt. Ltd grew 25% to 9,800 units in 2017—its highest ever in India—but Pawah thinks car sales could have grown even higher in 2018 had it not been for the sudden hike in duties. A hike in duties will increase the price of BMW’s offerings from April.

“At BMW India, we are expanding the market faster by launching new products and introducing new segments. A stable policy could have resulted in faster growth, and the government could have also collected higher taxes as more cars would have been sold,” Pawah said.

This year’s budget proposes an increase in custom duty of imported completely knocked down (CKD) versions of large passenger and commercial vehicles to 15% from the existing 10%. Same is the case for import of bus and truck radial tyres. The custom duty on imported completely built units (CBU) of large passenger and commercial vehicles was hiked to 25% from 20%.

Also, customs duty on certain components such as engines, transmission, brakes and other parts have been doubled to 15% from 7.5%.

These measures have been taken to promote local manufacturing of premium vehicles and critical automobile components across segments which are expected to create more jobs.

The increased custom duty meant luxury cars will become more expensive, and that may have an impact on sales as the GST Council also revised the cess on such vehicles in 2017, which slowed down sales.

After the implementation of GST, luxury car makers were hopeful of reporting significant growth in sales as total tax imposed on the vehicles were reduced to 43% (28% plus 15% cess) from over 50% before. Subsequently, the GST Council revised the tax structure of such vehicles and increased the cess from 15% to 25%.

As of now, some of the critical components of luxury vehicles are not made in India and the localization levels—sourcing of components from local manufacturers—are not as high as some of the mass market vehicles.

“If a luxury car is being bought through a corporate account, the increase in taxes does not matter. Only when it is being bought by an individual, the increased taxes matter. Also these manufacturers should look at used-car sales as well to increase the overall luxury car sales in the country. Though most of the manufacturers have started looking at this segment, still it is at a very nascent stage,” said Avik Chattopadhyay, founder of Expereal, a branding strategy firm.livemint

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