Auto makers in excise-free zones not safe from higher duties

Tuesday 20 March 2012, 11:15 AM by

Impact of higher taxes proposed on the Union Budget 2012 is bound to fall on the car makers operating in the excise-free regions as they are not qualified to claim aggregates and modified value-added tax (Modvat) on buying parts from vendors. The main reason for this is that car makers operating from such areas currently enjoy excise rebates, while others don’t. According to analyst, auto firms like Ashok Leyland Ltd, Hero MotoCorp Ltd., Mahindra and Mahindra Ltd. (M&M), and Bajaj Auto Ltd. will be affected by this budget decision.

However, some firms like Hyundai Motor India Ltd., Maruti Suzuki India Ltd, and Honda Motorcycles and Scooter India Pvt. Ltd, will remain unaffected. Manufacturers of finished products get exemption from excise duty borne by suppliers under Modvat scheme.

The manufacturers will have to bear the increasing cost of purchase when a plant is located in the excise-free zone. Input cost for the manufacturers is likely to increase as 2% hike in excise duty will be passed by the vendors to them. According to the analyst, companies will either have to reduce their production or pass the entire cost to the buyers. Senior vice-president, equity and research, at brokerage Fortune Equity Brokers India Ltd., Mahantesh Sabarad, said, “The higher are the number of units produced on the excise-free zones, the greater will be the impact.”

As per reports, M&M have already announced price hikes for all excise free zones comprising three-wheelers plant in Haridwar in Uttarakhand and utility vehicles facility in Chakan near Pune and tractors production unit in Rudrapur in Uttarakhand. However, in this regard, Hero MotoCorp, Bajaj Auto and Ashok Leyland are yet to make announcement. PawanGoenka said, in fiscal 2012-13, overall tax outgo of M&M will be Rs.850 crore. Rs.761.67 crore has been paid by the company in fiscal 2011, which is 3.8% of its gross sales. According to Goenka, the tax burden comprises an overall 2% hike in excise duty, increase in excise duty on automobiles and customs duty hike of 2.5% on non-alloy, flat-rolled steel.

Apart from additional duty on small cars, the larger cars having displacement of 1,500cc will also carry excise duty of 24%. On 16th March 2012, Rs.3,000 to Rs. 35,000 price hike has been announced by M&M to offset the impact. Top end variant of models like XUV500 will carry 29% excise duty according to Goenka. He further informed that tractors production cost increased by Rs.5,000-6,000 or 1% of the selling price. Manufacturing cost of utility vehicles will also increase by 2% or Rs.3,000-38,000 of the selling price.

Hero MotoCorp, the two-wheeler market leader, which manufactures its motorcycles in Haridwar is also likely to affected. Every month around 6,00,000 units of motorcycles are produced by Hero. Even Bajaj Auto, operating in Pantnagar in Uttarakhand will be affected.

India’s second largest commercial vehicle maker, Ashok Leyland, which has a facility in Pantnagar will also be impacted. An analyst at Centrum Broking Pvt. Ltd. said Pantnagar unit contributes one-fourth of its total production. He further added, “With the freight rates already being under pressure, any price hike by a commercial vehicle maker will not go down well with the fleet operators,” Shethiya said. “Even for tractors, the hike may dampen sales.”