India’s auto stocks cheer after Parliamentary Panel agrees that they need more stimulus and the dealers need loans with less collateral

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India’s auto stocks cheer after Parliamentary Panel agrees that they need more stimulus and the dealers need loans with less collateral
Representative imageBCCL
  • The BSE Auto index surged nearly a percent on December 16, with Ashok Leyland and Tata Motors leading the way. The index has gained 16% since September 30.
  • A Parliamentary Standing Committee seeks more stimulus aside from other measures to boost demand, and revive the auto industry in India.
  • The recommendations include regulatory relief, financial incentives for the scrappage policy, discount on research and development and more loans for dealers, but with less collateral.
  • The Committee also recommended reducing the GST rate to 18% from 28% to bring down a sizable amount in vehicle price.
  • Check out the latest news and updates on Business Insider.
Indian benchmark indices remained in the grip of bulls, recording fresh highs during the trade today and one of the big drivers of today’s rally were the auto stocks. The BSE Auto index surged nearly a percent on December 16, with Ashok Leyland and Tata Motors leading the way.

Car and truck makers in India are not in good shape. The car makers were already broken with months of falling sales before the pandemic struck but now, there is hope in the horizon⁠— a parliamentary panel can see their pain. Their proposals include a recommendation to cut Goods and Services Tax (GST) rate by 10%.

A Parliamentary Standing Committee, which pegged the loss to the industry at about ₹2,300 crore ($312 million), wants the government to release more stimulus to revive the sector.

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StocksToday's gain
Ashok Leyland5.48%
Tata Motors2.07%
M&M1.89
TVS Motors1.88%
MRF1.62%
Source: BSE Auto Index

There has been some recovery in auto sales in recent months. But, there is a peculiar situation in India, where the car makers and the dealers can’t agree whether the sales in the month of November were good or not! While the Society of Indian Automobiles, the lobby of car manufacturers, said it has been a great month, the dealers association wasn’t as excited.

The recommendation from the Parliamentary panel has come at a time when car makers like Maruti and Mahindra & Mahindra have already announced discounts⁠— a usual fair at the end of every year⁠— after a losing an entire year to the pandemic and its extended impact. The recovery of this segment of industry is important because it employs a large number of people, many unskilled or less-skilled ones, and as per the panel’s estimate, 345,000 people have already lost their jobs.

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These are major items recommended by the Parliamentary Standing Committee:
  • Consider wages paid to contract workers as charity: The committee recommended that the expenditure incurred by automakers for making payments to the temporary and contract labour during the lockdown period should be eligible as corporate social responsibility (CSR) expense. This move will help the automaker from tax paid on salaries.
  • Give more time to pay suppliers and vendors: It also recommended that the condition to avail ITC (Input Tax Credit) requiring payment of invoice to the supplier within 180 days of invoice to be done away with, till the situation returns to normal. Or at least should be provided with a waiver of interest which is charged from the date of invoice of the supplier, as most payments to the vendors will be deferred in the present scenario. The input credit helps the automaker to reduce the already paid raw material tax at the time of paying tax on output.
  • Reduce need for testing and regulatory approvals: A provision should be made for acceptance of self-certification by OEMs, instead of testing and approval by Government agencies for meeting regulatory requirements. Also a prioritised attention should be given to new approvals of alternate materials/parts identified for testing for compliance and validation purposes and fast track approvals by testing agencies.
  • Double the waiver on demurrage charge: Instead of 50%, 100% waiver on demurrage charges to be provided at the Airports/Seaports and rail yards until 1 month post resumption of full commercial production.
  • Reduce depreciation on value of vehicles: To make up the lost sales in March 2020 vehicles purchased till May 30 be permitted to enjoy 6 months depreciation in FY 2019-2020 — which will help in stimulating sales.
  • Discount on research and development: The government should also give a temporary exemption on import/export taxes and a 50% discount in testing prices in National Automotive Testing and R&D Infrastructure Project (NATRIP) facilities.
  • More loans for dealers, but with less collateral: The Committee also recommended that the collateral norms for regular loan products for Auto Dealers should be moderate for availing required finance. It addressed that though banks have been facing various challenges because of bad loans, however, they should not look at all financial lendings with the same eye as the recovery rate is very high in the auto sector.
  • Financial incentives in the Scrappage Policy: The committee said that in addition to setting of Automotive Vehicle Scrapping Facility (AVSF) centres across the country, the government should make provisions for upfront financial incentives in the Scrappage Policy to boost demand for purchase of new vehicles.
  • GST reduction: To mitigate this cost increase, the Committee said the reduced GST rate to 18% from 28% at the moment. It said it will bring down a sizable amount in vehicle price creating more demand for newer vehicles. The increased sale due to the reduction in GST rate, will cover up the loss in GST revenue.
Federation of Automobile Dealers Associations of India President Vinkesh Gulati welcomes the recommendations from the Parliamentary Standing Committee.

“We had recommended One Nation – One Road Tax. I am happy to note that the committee found it relevant. It will also be praiseworthy if the Government accepts the committee’s recommendation of introducing effective rate of depreciation as 25% on permanent basis thus helping in improving sales,” he said in a statement to Business Insider.

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