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How the Budget Will Affect Car Prices

SUV buyers have reason to fret, but Maruti’s Ertiga falls between the cracks

Published: Mar 16, 2012 08:23:26 PM IST
Updated: Mar 16, 2012 08:27:51 PM IST
How the Budget Will Affect Car Prices
Image: Amit Verma

Right now, all dealer sales representatives are busy calling up customers and asking them to close the sale of their vehicle purchase. Or pay a higher price for their car starting tomorrow. A sales representative at Volkswagen in Mumbai that Forbes India spoke to was running from pillar to post. All he said was prices have gone up and we will get to know the new price for the vehicles tomorrow. According to him, as per the new duty structure, in the last year the price of the Volkswagen Jetta has gone up by around Rs 160,000. “Earlier this week we increased the price by Rs 80,000 and now after this announcement I think it will go up by another Rs 80,000,” he said. 

For all those who, undeterred, are still shopping for a smooth ride home, here are some numbers.

Excise duty is up from 10 to 12 percent. So, for a car under 1,500 cc, the new excise duty is up by 2 percent. That covers a lot of popular small or hatchback cars in India like the Alto, Wagon R, Swift, Figo, Brio, Polo, Fabia and the Punto. So what does this excise hike mean for you? Well let’s say your car ex factory cost is Rs. 300,000. Excise duty on this car increases from Rs. 30,000 to Rs. 36,000. Add dealer margin (which differs from manufacturer to manufacturer) of about 3-5 percent. At the ex showroom price, you don’t really have to shell out a lot more than before.

But what’s interesting is what Finance Minister Pranab Mukherjee has in store for cars above 1,500 cc—largely SUVs like the Bolero, Scorpio, Xylo, Innova, Safari and enthusiast cars like the Skoda/Volkswagen Fabia and Polo 1.6. Excise duty on these cars used to be 22 percent + Rs 15,000. Now the FM has changed the duty to a single ad valorem of 27 percent. Let’s calculate the change in duty for a SUV for which the ex factory price is Rs 800,000. The duty for this vehicle, in the old taxation scenario, worked out to be (@ 22 percent) Rs. 176,000. Add Rs. 15,000 (duty again). The total excise duty was Rs. 191,000. So the cost of the SUV before it has rolled out of the factory was Rs. 991, 000.

Now, in the new excise regime, we have a rate of 27 percent. Doing the same calculation, the duty works out to be about Rs. 216, 000. So the total cost of the SUV before it has rolled out of the factory is Rs. 1,016,000. So the price for a SUV has gone up sharply: By almost Rs. 25,000. Which makes the M&M Bolero, Xylo, Toyota Innova, Tata Safari’s of the world expensive by a good amount.  

But there is a googly. One car stays out, competes with all of the above-mentioned SUVs and still has a far lesser excise duty. It is the Maruti Suzuki Ertiga. The seven-seater Multi Utility Vehicle (MUV) that is going to be launched next month. Ertiga has an engine cubic capacity of less than 1,500 cc so it attracts lesser excise duty. Maruti is the real winner here. The Ertiga will pay excise duty of 12 percent compared to its rivals who will pay almost 27 percent.

“Well it will compete with Xylo, Innova and even the Tata Safari and the M&M Scorpio. The Ertiga is well placed there,” says Deepesh Rathore, managing director of IHS Automotive.  

Another announcement is the excise duty on completely built units (luxury cars). Earlier taxed at 60 percent, under the new duty structure they will be taxed at 75 percent. Details on how this will play out in the market are still being worked out. The Volkswagen sales representative quoted earlier said that the Beetle will be super expensive now. CBU, luxury car buyers (the likes of BMW 5 and 7 Series and Mercedes and Audi’s of the world) will have to loosen their purse strings a little bit more!

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