Vehicle Scrappage Policy makes the right noises

BL Research Bureau

The announcement of a scrappage policy for personal and commercial vehicles is good news. But one needs to wait and watch for the adoption levels for the policy to be counted a success as it is voluntary. With vehicle fitness becoming a key criteria for scrapping as per the Budget announcement, mandatory fitness testing for heavy commercial vehicles is applicable only from April 1, 2023 while it will be introduced for other vehicles in a phased manner from June 1, 2024. The incentives too are only at a proposal stage and one is not sure whether they will retain the same form when the policy is finalised after stakeholder comments. Thus, whether the policy will result in an immediate boost to auto sales is moot.

No immediate boost

While sale of personal vehicles such as cars and two-wheelers saw rebound after the lockdown, the demand is still on a sticky wicket. For the first eleven months of this fiscal, passenger vehicle (cars and UV sales) is down 10.35 per cent over the same period the fiscal 2020.

Though some segments like light vehicles and haulage vehicles have seen a pick-up among commercial vehicles sales are not fully out of the woods too. Data from the Indian Foundation for Transport Research and Training on freight rates in key routes across the country shows that in the last year, fleet utilisation and truck rentals have predominantly been supported more one-offs such as non-availability of trucks due to localised lockdowns, festival season demand and rise in diesel prices. Cargo availability, especially for industrial and consumer goods has been lacklustre, though demand for transport of agricultural goods has been a bright spot to an extent.

That said, the low base of this fiscal is for both personal as well as commercial vehicles as well as a heating up of economic activity is expected to provide a tailwind for pick-up in sales FY22.

According to the Transport Minister, an estimated 51 lakh light motor vehicles (LMVs) that are above 20 years of age and another 34 lakh LMVs that are above 15 years are expected to be scrapped. About 17 lakh medium and heavy motor vehicles, which are above 15 years, and currently without valid fitness certificates, would also face the axe. But one is not sure of the timeline in which these vehicles will come up for scrapping. Considering that the scheme is voluntary and that mandatory fitness testing is coming in only in 2023 /2024, the scrappage policy, could provide a further boost to auto sales immediately only if buyers voluntarily adopt it in huge numbers.

Wait for the fine print

The scrappage scheme has undergone three iterations till date.

The Voluntary Vehicle Fleet Modernisation Programme (V-VMP) outlined in May 2016 proposed that vehicles (predominantly trucks) bought prior to March 31, 2005 or those below BS IV emission standards, would be eligible for incentives if they were scrapped and replaced with new ones. Owners would get 50 per cent waiver on excise duty on the new vehicle, discounts from the auto manufacturers and the scrap value of the vehicle.

In 2018, the age of vehicles to be scrapped was increased to 20 years, sharply shrinking the number of eligible vehicles. Also, the implementation date was set to 2020.

Budget 2021 revised the age of vehicles to be scrapped once again. As per the Budget as well as the Ministry’s proposal on March 18, personal vehicles will have to undergo fitness tests after 20 years and commercial vehicles, after 15 years. Those that fail the test, would be scrapped. For personal vehicles, failure to renew the registration certificate after 20 years will also lead to scrapping. As a disincentive measure, increased fees for fitness certificate and fitness test may be applicable for commercial vehicles 15 year onwards from the date of initial registration; increased re-registration fees will be applicable for private vehicles 15 year onwards from the date of initial registration.

Attractive scrap value for the old vehicle, tax incentives and discounts on the new vehicle as well as adequate scrapyard facilities are keys to achieving the objective of reducing pollution as well as boosting auto sales.

To this extent, the announcement says that a scrap value for the old vehicle, which will be 4-6 per cent of the ex-show room price of a new vehicle, will be offered. Besides, automakers are advised to offer a five per cent rebate for those buying a new vehicle after producing a scrapping certificate. However, as against the excise duty concession envisaged in the earlier VVMP, there seems to be no GST incentive – at least not yet. A road tax rebate of up to 25 per cent for personal vehicles and 15 per cent for commercial vehicles by the state governments, as well as a registration fee waiver may be offered.

As far as the scrapyard facilities go, draft rules for a ‘Registered Vehicle Scrapping Facility’ has been put out.

In the near-term, the success of the scheme would depend on how attractive the final ‘cash for clunkers’ scheme is for customers and fleet owners, though failure of mandatory fitness testing or failure to renew registration certificate may bring a regular chunk of vehicles for scrapping from 2023/2024 onwards.