India’s Duty Pinch Threatens To Delay Luxury Car Market RevivalFebruary 5, 2021
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.
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.”