Luxury car prices set to drop dramatically

Luxury cars are set to get dramatically cheaper. Not just the ones from Europe, but also from Japan and South Korea. Over the next few years the government is expected to slash customs duty on vehicles shipped from EU countries, which includes Germany, as well as Japan and South Korea, countries with whom India has free trade agreements (FTAs). European car makers will get a head start as the government, beginning 2017, has offered to lower the customs duty to 30% on cars under the proposed trade & investment agreement with the EU. Japanese and Korean car makers are also expected to get the same benefit with a lag of a year or two, although a final decision on the issue is still awaited, sources in the government said.

Currently, cars with a landed cost of over $40,000 (around Rs 22 lakh) face 100% customs levy, and those below that pay 60% import duty. In case of EU, there is also a move to allow the import of at least 2.5 lakh cars at 10% duty between 2017 and 2021. (So the Mini Cooper's price could be halved.) Anything above the quota will come at 30% levy. Customs duty reduction to 30% will mean that the total duty incidence, including local levies, would fall to around 80% from 174% currently, which includes countervailing duty, special additional duty and cesses and surcharges. So, for a car with a landed price of around Rs 25 lakh, which currently costs Rs 69 lakh will then come for Rs 45 lakh — a reduction of almost 35%, provided local levies stay at current levels.

Although the duty concessions would be available to all cars, industry players expect imports to be limited largely to the luxury segment, where lower volumes do not justify local manufacturing. Which is why global giants import luxury cars as completely-built units (CBUs). Despite a common duty structure, Korean and Japanese carmakers may not gain as much as the Europeans as they are more in the mid-market segment than in the top-end, said industry players. Already, companies such as Honda, which was importing the CR-V as a CBU from Japan, have now started assembling it locally.

Lamborghini India head Pavan Shetty said the duty reduction will give a big boost to demand for luxury cars. "It will surely expand the market, by at least double. By 2017, the per capita income as well as the domestic economy will expand from the current levels, and the infrastructure will also be better. The timing of the duty reduction will thus be perfect to give a fillip to sales," he said. While the government was initially unwilling to accept the demand, there is now a growing view that other countries and trading blocs with which India has a FTA should be given a level-playing field.

Earlier, top commerce department officials had said that EU or others who sign trade agreements later would gain more. But that argument seems to have been junked. "Japan is the largest investor in the Indian automobile sector. It will be difficult for us to deny them the benefit," said a source, who did not wish to be identified. After all, trade agreements are subjected to periodic reviews and South Korea and Japan have already written to the government seeking that the auto duty structure under the comprehensive trade agreements be brought at par with EU. Domestic carmakers, however, fear that the move to ease import duty will impact local manufacturing. But government officials said that the auto industry cannot be given an indefinite protection by maintaining high tariff walls.