Automobiles: VAT's the diesel impact

Tata Motors and M&M may be impacted but long-term cost benefits of diesel to prevail.

First the bad news, the Delhi government’s proposal to charge an additional 25 per cent value added tax (VAT) on diesel vehicles, is likely to make it dearer by 1-2.5 per cent. Vehicles costing up to Rs 6,00,000 will be charged 5 per cent VAT, from 4 per cent earlier. Vehicles between Rs 6,00,000 and Rs 10 lakh will attract 8.75 per cent VAT (7 per cent earlier), and those above Rs 10 lakh will come with a VAT of 12.5 per cent (10 per cent).

Will this hurt the demand? If analysts are to be believed, the impact will be minimal. Around 2.08 lakh cars and 28,000 utility vehicles are sold in the Indian market every month. Delhi is estimated to register 36,000 vehicles a month, of which 30-40 per cent will be diesel. The number of diesel cars sold in Delhi forms 5-6 per cent of the total cars sold in India. According to back of the envelope calculation by research firms, the prices of diesel cars are likely to go up by 1-2.5 per cent in the state. Companies such as Tata Motors and M&M are expected to be impacted the most.

According to a report on the impact, Sharekhan says, even though diesel cars account for the bulk of M&M’s portfolio, the impact will be restricted as Bolero is a rural product. Scorpio and Xylo (an average monthly run-rate of 6,000 units) may see a moderate impact as Delhi accounts for only 3 per cent of their volumes. “Tata Motors would be affected the most with Indica and Manza being the primarily diesel vehicles.” Maruti Suzuki is likely to be the least affected as it derives 10 per cent of its total sales from Delhi, of which diesel vehicles account for only 20 per cent. Overall, the impact would be on about 2 per cent of its volumes. The management has communicated that it does not expect to get affected by the move and feels customers would absorb the additional cost.

Though, there will be some impact on these companies as they will have to effect another round of price rise. Analysts believe, the move is unlikely to have any major impact, as they observe that operational savings from diesel vehicles compared to petrol vehicles have gone up by over 100 per cent in the financial year till date. Higher taxes will not shift preference of diesel customers.