Rough ride: Woes in auto industry far from over

Depreciation is the deduction allowed for the decline in the real value of an asset used by a taxpayer.

By Shashank Dipankar 

Top players of the automobile industry feel that recent measures announced by finance minister Nirmala Sitharaman would certainly help in boosting the consumer sentiment, but the GST rate cut from 28% to 18%, which they were demanding, would have been the real demand stimulant. However, that was missing from the announcements made on Friday.

On Friday, Sitharaman announced a slew of measures to tackle slowdown faced by the automobile industry. Measures included, BS-IV vehicles bought up to March 2020 to remain operational for its entire period of registration, additional 15% depreciation on all vehicles acquired from now on till March 31, 2020, deferring the proposed hiked registration fee till June 2020 and lifting the ban on purchase of new government vehicles.

The additional 15% depreciation will apply to vehicles bought for commercial use. It will benefit the businesses as they can claim additional 15% depreciation while filing income tax return. Depreciation is the deduction allowed for the decline in the real value of an asset used by a taxpayer.

The IT department uses depreciation for the purpose of writing off the cost of an asset over its useful life. Higher depreciation could lead to a tax benefit of 5% of upfront cost and even lower on NPV (net present value) basis, according to a Jefferies report. Currently depreciation allowance stands at 15% for vehicles used for personal use and 30% for motor buses, motor lorries and motor taxis used in a business of running them on hire.

Speaking about the measures, Rohit Suri, president and MD, Jaguar Land Rover India, said, “While the increased depreciation from 15% to 30% and deferment of increased registration fees till June 2020 will have a positive impact, moderation of GST base rate from 28% to 18% for all categories as being requested by the auto industry for sometime now would have been the real demand stimulant.”
According to Fitch Ratings, Subdued demand conditions that led to weak performance by Indian automakers in the first quarter of the financial year ending 31 March 2020 (FY20) will likely persist, adding to the challenges from the implementation of stricter emission norms under BS-VI from April 2020, says Fitch Ratings.

Most auto OEMs reported lower volumes and profitability in 1QFY20 as domestic sales volumes of passenger vehicles and medium and heavy commercial vehicles fell by 18.4% and 16.6%, respectively, according to the Society of Indian Automobile Manufacturers.
Pawan Goenka, MD, Mahindra & Mahindra, said, “The announcements made by the government will go a long way in improving the sentiments. Not much was announced to reduce the transaction cost but several other methods that will incentive vehicle purchase.”
RC Bhargava, chairman, Maruti Suzuki India, has noted that the government needs to take steps to bring down the prices of vehicles either by cutting GST or rolling back road taxes imposed by nine states in order to trim the slowdown.

Overall auto sales volume would decline in FY20, explains Fitch Ratings, even as volumes may stabilise due to government’s focus on improving liquidity from lenders and other measures to boost auto demand. Increased rainfall and recent cut in interests rates should help in a demand pick-up in second half of FY20. However, lower volumes will weigh on automaker’s profitability in FY20 and could offset the benefits from lower commodity prices.


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