Why green tax may not boost replacement demand for vehicles

The government’s proposal to impose “green tax” on old vehicles may not trigger a meaningful surge in the replacement demand given the lower quantum of tax. Therefore, a major upward revision in the automobile demand estimates by analysts pertaining to the latest proposal looks less likely.

The Ministry of Road Transport and Highways has approved a proposal to levy a tax at the rate of 10-25% of the annual road tax paid by commercial fleet owners for vehicles which are older than eight years. The tax will be as high as 50% in cities with high pollution.

A heavy truck with a capacity of 16 tonnes or more incurs a road tax of Rs 15,000-40,000 annually. A leading fleet operator in the southern part of India told ET that he pays around Rs 40,000 per annum for a 42-tonne truck, which is one of the highest tonnage truck segments. It means the additional payout due to the green tax on heavy trucks would be Rs 3,750-10,000 per year. Since it is just 0.5-1.2% of the initial price of medium and heavy trucks, it will not have much of an impact on the fleet operators’ income.

In addition, higher tax in large cities may not translate into a higher replacement demand because the percentage of trucks registered there is quite low. Analysts expect 25% and 75% volume growth for FY22 and FY23 for heavy trucks and over 50% growth for light commercial vehicles. Given the lesser quantum of the green tax, it is unlikely to change volume estimates for Ashok Leyland and Tata Motors.

According to industry estimates, there are over one crore commercial vehicles (CV) plying on Indian roads. Of this, 25-30% or around 30 lakh vehicles are older than eight years. This is nearly three times the average annual CV sales in the country. A higher green tax may therefore have a potential to boost the replacement demand significantly since the average useful life of CVs is around 25 years. The replacement demand constitutes nearly two-third of the total CV demand.

The ministry has also proposed a tax on personal vehicles though it is yet to specify the quantum. The green tax will be levied at the time of renewal of the vehicle registration which takes place after 15 years of the first registration. However, the operating life of personal vehicles is usually less than 15 years. Also, in rural areas, tax compliance is an issue. These factors would limit the scope of the green tax to increase the replacement demand of personal vehicles.