The 23 percent growth in passenger cars and jeep sales in 10MFY18 was surely refreshing, but it seems this growth in the sector will have to be short-lived. Car sales are set to witness a significant plummet as automakers have instructed dealerships and told customers unequivocally that they will no longer be selling cars to non-filers of income taxes. Though the new restriction on the “booking, registration and purchase” of new and imported vehicles will come into effect on July 1, since delivery of cars takes up to 4-6 months, automakers will have to cancel bookings already made. Non-filers who have booked vehicles and are waiting for delivery are in a pickle. The government, for once, is sticking to its guns.
But should it? Automakers believe it is a step with too many moving parts and may not yield the desired outcome of bringing more people into the tax net. In fact, they believe that the “own-money” will flourish as a direct consequence of this restriction. Own-money is when investors and profiteers buy vehicles in large volumes and sell them off to customers on a premium. This premium often goes up to Rs200,000-250,000 for high-end Corolla and Honda cars. This first became popular because automakers were delivering cars 4-6 months after booking and consumers wanted their cars delivered instantly; for which they were willing to pay a fee.
While Indus Motors has been actively discouraging this phenomenon by canceling multiple bookings made by so-called investors, the company did it knowing that the demand for its cars was very present. And consumers could just go to their dealer, book the car and wait patiently for delivery. But would this company or any other automaker double down on investors knowing that most of the consumers are unable to buy their cars any other way. Could we make an argument for a profit-making company to carry the burden of curbing the investor element at the cost of its own profits? After all, the responsibility to discourage any illegal, deceptive or anti-competitive activity in the industry falls on the government.
If somehow the government also comes up with a foolproof strategy to discourage the own money market, the decline in sales would hurt its own revenues as well. BR Research’s earlier calculations estimated that 20-25 percent of the price of the car is made up of taxes. The government has a lot of skin in the game. In fact, earlier, it was earning extra revenue as taxes on non-filers were higher on the purchase of vehicles.
If the government is willing to part with a good portion of its revenues, the third likely consequence is a boost to the used cars market. Having failed to successfully regulate the used cars industry many times over the past decade—the latest unsuccessful attempt being just a few months ago—non-filers will have no choice but to turn to used cars. Since the restriction is on the first registration, and on only new vehicles, it doesn’t extend to either used cars or transfer of vehicles. So this side of the illegal gravy train will be up and running.
Lastly, it is a tricky move since the government’s ambitious auto development policy is bringing a handful of new players into the mix. If this restriction leads to a fall in demand, which is inevitable, wouldn’t it discourage new players from sticking it out? The industry’s association believes that not only will the government lose up to Rs100 billion in revenues, this condition would also reduce the market size by 200,000 units annually.
It is true that the government direly needs to broaden its tax base, but for a range of reasons, it doesn’t seem like this restriction will push consumers to file their taxes. They would be more willing to explore other loopholes. If, however, the government comes up with a better policy to combat illegal investor market and extends this limitation to used cars as well as transfer of vehicles, perhaps, consumers will have no other choice but to file. But in its current state, this new condition is unaspiring and ineffective.
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