India: selling cars gets more expensive

It’s never been easy to sell luxury cars in India. The duties on fully assembled imported cars is 60 per cent (which effectively becomes 110 after VAT and local taxes), while the tax on locally-made cars with imported engines is 10 per cent.

So many nervous car makers will have poured over India’s most recent budget announcement on Monday for changes to import taxes. To their dismay they will have found a recent change that could mean cars built in India using imported engines will be treated as fully imported. The change is expected to add over Rs 800,000 ($4500) to the price of entry-level cars of companies like BMW, Audi and Mercedes. It will also affect local companies which import engines like Tata and Mahindra.

For German luxury carmakers this comes as a rude shock, in particular because the luxury car prices were expected to fall after the enactment of the proposed India-EU free trade agreement in April.

But it also comes as a shock to a handful of local Indian companies.

Luckily for Tata Motors, it has already announced plans to manufacture engines for its Freelander model entirely in India.

But for other companies it isn’t as easy as relocating factories to India. Suhas Kadlaskar, director and board member of Mercedes-Benz India, told beyondbrics that the company doesn’t have the option to move production to India because of tough union rules in the company’s home market in Germany. He said: “There is no question of relocation even if there is a cost impact.”

So what is the real motivation behind the proposed new tax?

According to analysts the change in the budget is directed at the Skoda Fabias and the Volkswagen Golfs rather Rolls-Royces and Bentleys.

“The idea is to get mass market manufacturers such as Skoda and Volkswagen to produce their engines in India to form the basis of an auto industry,” said Mohan Guruswamy of the Centre for Policy Alternatives.

Industry officials insist this is a double-whammy victory as it allows the government to increase the share of manufacturing to a desired 25 per cent of GDP from the current 16 per cent over the next 10 years, at the same time increasing levels of localization.

Meanwhile, the Society of Indian Automobile Manufacturers (SIAM) has come to the rescue of worried luxury carmakers promising to mediate and address this issue with the finance ministry.