Can cars be made more affordable in India?

Transcription

1 Can cars be made more affordable in? Only four people in a thousand own a passenger car in compared to 35 people per thousand in Thailand, 92 in Brazil, 187 in South Korea and over 450 in the developed world. Moreover, passenger cars accounted for only 12% of all vehicle sales in in compared to 80% for two-wheelers. In contrast, passenger cars account for over 70-80% of the total vehicle sales in most developed automobile markets. Clearly, the acceleration in the n automobile industry over the last decade in terms of the growing number of models, easy availability of finance, lower interest rates and a growing used car market, has not pushed up penetration levels substantially. In CRISIL s opinion, in order to revive the n passenger car market, it is crucial to make cars more affordable and tap the potential that s large population offers. Passenger car penetration remains low in largely due to the high acquisition cost (resulting in part from a high tax burden) vis-a-vis per capita income levels. Following the rationalisation of sales tax in 2000, the sales tax incidence has increased from 3-6% in some states to 12%, further increasing the already high tax burden on passenger cars in these states. Excise duty, which forms the largest share of the overall taxes on cars, remained constant at 40% in the 1994 to 2001 period. Although excise duty on passenger cars was reduced to 32% in , it continues to be much higher than that in other countries. Low penetration levels Compared to advanced automobile markets, income levels in are significantly lower at $2,200 per capita. Hence, while the average number of months salary required to purchase a car in is 28 months, it is 16 months in Thailand, eight months in Malaysia and as low as three months in the US and western Europe. The linkage between income levels (measured as gross domestic product (GDP) per capita) and car penetration levels (measured as the number of registered passenger cars per thousand population in 2000) is evident in the chart below., at four cars per thousand population, and China, at around six cars per thousand population, appear on the bottom left with their low per capita income and low number of passenger cars in relation to their large population. s car penetration level compares poorly with a level of 460 cars per thousand in USA, 414 in and 390 in UK. Even other Asian countries such as Malaysia and Korea have relatively higher penetration rates of around 187 cars per thousand population. 1

2 Income levels vs car penetration levels Cars per thousand Malaysia Korea Brazil Thailand China Italy Germany Spain UK USA GDP Per Capita Sources: Compiled by CRISIL based on GDP per capita (based on purchasing power parity) and population figures from Central Intelligence Agency (CIA), USA Number of registered passenger cars from ANFAC, Automobile Manufacturers Association, Department of Land Transport of Thailand, Department of Statistics-Malaysia, and Society of n Automobile Manufacturers (SIAM) Notes: The number of passenger cars in use is usually lower than the number of registered vehicles by around 10-15% The above data relates to the year 2000 Significantly high tax burden Traditionally, passenger cars in have been heavily taxed as they are regarded as a luxury item. Various taxes such as excise duties, central and state sales tax have a cascading effect, pushing up the ex-factory price of a car by around 60%. In addition, there are municipality taxes and registration taxes. In other words, almost one third of every rupee that an n customer pays for purchasing a car is on account of various taxes. This is much higher than that paid by customers in US at around 4% or, at around 10%. Even within, taxes on passenger cars are much higher than those on two-wheelers and commercial vehicles, which have a cumulative taxation rate of around 30% of the retail price. The following table compares the extent of the tax burden on car prices across various countries. 2

3 Tax Burden on consumer prices Korea 30% (143) 37% (159) Brazil Spain Italy UK Germany 19% (124) 17% (120) 16% (120) 15% (118) 14% (116) ( 26% (135) US 4% (104) 9% (110) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1. Ex-factory price has been assumed as 100 units and post-tax price index (figures in brackets) has been calculated by loading all the relevant taxes to the ex-factory price 2. Tax Burden (horizontal axis)= Total Taxes on acquisition and initial registration / Consumer prices with taxes 3. Transportation charges and municipality taxes have been ignored for computing post-tax prices 4. The above data relates to cars with 1,500 cc engine capacity Taxes on acquisition and registration: - 32% Excise duty, 4% central sales tax and 12% state sales tax; South Korea- 7.5% special excise tax (SET), 30% education tax on SET, 10% value-added tax (VAT), 2% acquisition tax and 5% registration tax; Brazil-25% Industrial Products Tax, 12% tax on services and circulation of goods, 3% contribution for social security financing; Spain-16% VAT, 7% sales tax; Italy- 20% VAT; % VAT; UK- 17.5% VAT; Germany- 16% VAT; -5% consumption tax, 5% acquisition tax; US- 4% consumption tax considered as average of the states of California, Florida and Michigan Sources: Compiled by CRISIL based on data from Association of European Automobile Manufacturers, Automobile Manufacturers Association, ANFAVEA, Statistical Yearbook of the Brazilian Automotive Industry 2002, Asia-Pacific Economic Cooperation The tax impact can be evaluated by comparing the average post-tax and pre-tax prices of cars across various countries. As evident from the chart below, there is a wide disparity in the pre-tax average prices of cars with prices in being relatively lower than those in other countries. But much of this advantage is lost in post-tax price due to the high tax burden. For instance, pre-tax car prices in are 40% lower than those in but post-tax prices are just 12% lower. Impact of taxes on 1.6 lite car prices Europe Malaysia US 13,542 14,684 16,318 15,311 14,653-2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Pre Tax Car prices Tax Burden US $ Note: The above prices represent the average price for 1.6 litre cars Uin US dollars Source: Automotive Trade Policy Council except data for 3

4 Lower tax burden would make cars more affordable Given the low penetration levels, there is a large demand potential for cars in. This can be tapped by reducing the tax burden and consequently, car prices. For instance, if the cumulative taxation on passenger cars was reduced to 25% of the car price, the price of a car in the A segment would be Rs. 200,000 (compared to the current average price of Rs. 2,50,000). A B segment car would cost Rs. 2,90,000 (Rs. 3,70,000) and a C segment car would cost Rs. 4,80,000 (Rs. 6,10,000). To determine the potential demand that could be generated by lowering the tax burden, the incremental number of households that would be able to afford an entry-level car at lower prices needs to be considered. Threshold annual household income of Rs. 2,90,000 for purchasing a new car in Given that almost 70-80% of the cars in are financed through loans, it will be appropriate to compute the threshold annual household income for purchasing an entrylevel car through a loan. In Rs Price of an entry level new car 250,000 Loan Amount 200,000 EMI 79,740 Insurance 10,000 Fuel cost 27,500 Maintenance cost 5,000 Total outflow to be funded 122,240 Total outflow to income ratio 60% Take-home Pay 203,733 Gross Income 291, The price of a Maruti 800 has been assumed as the entry-level price for a new car 2. Equated Monthly Installment (EMI) has been calculated assuming 12% annual rate of interest on reducing balance, down payment of 20% and repayment over three years 3. Insurance costs assumed at 4% of total vehicle price 4. Fuel cost assumed at an annual driving distance of 10,000 km, fuel efficiency of 12 km per litre and a petrol cost of Rs. 33 per litre 5. Total outflow to income ratio has been assumed based on discussions with a leading car financier 6. Take-home pay has been assumed as 70% of the gross income Large demand potential for passenger cars Using these same assumptions, CRISIL has calculated car prices at various tax levels and the corresponding threshold incomes to estimate the incremental passenger car demand that can be generated at lower prices. The distribution of households across income levels has been estimated using the National Council for Applied Economic Research s A segment defined as small car economy such as Maruti 800; B segment defined as small car premium such as Santro, Zen, Indica, Palio; C defined as mid-size premium such as Ikon, Esteem, Accent 4

5 (NCAER) data on income levels (including unaccounted income) for and is, therefore, conservative to the extent that the growth in income levels has not been factored in. The eligible number of households at current tax levels is estimated at 6.54 million. With annual passenger car sales of around 6,00,000, it may be said that about 9% of the eligible households make a purchase every year. Assuming that this ratio of annual car sales to total eligible household population is maintained, the incremental annual demand potential is estimated to be around 1,60,000 cars if tax levels are reduced to half and around 2,80,000 cars if tax levels are reduced to one-fourth of the current levels 1. The likely revenue reduction for the government would be largely compensated by higher consumption of petrol, taxes on incremental sales of cars, higher corporate taxes of car manufacturers and other knock-on effects of increasing motorisation. Conclusion Lower car prices will help to revive the sluggish demand conditions currently prevalent in the n passenger car market. A part of the demand from potential two-wheeler buyers is also likely to shift to cars. In addition, existing car buyers will upgrade to higher models. This growth will also help to expand the used car market. Improvements in road infrastructure will, however, remain critical for achieving higher growth. For the industry, it will mean better utilization of existing capacities and improved profitability for the various car manufacturers and related auto-ancillary manufacturers. 1 CRISIL estimates that the current road infrastructure in with around 1,600,000 km of surfaced roads can support an annual demand of upto 900,000 passenger cars. 5