On March 18, 2021, the Union Minister for road, transport and highways Nitin Gadkari announced in the Lok Sabha a ‘voluntary’ vehicle scrappage policy which will lay the foundation for what he terms as “the Voluntary Vehicle Fleet Modernization Program and enable Indian automobile industry to more than double its turnover from the present Rs 450,000 crore crore to Rs 1000,000 crore in a few years. Besides, this will have a salutary effect on environment due to mitigated vehicular pollution.
Other benefits are expected by way of reduction in fuel consumption (as old vehicles get replaced by more fuel efficient new ones) and cut in import bill; boost to inclusive development as investment flows into setting up of scrapping and fitness centers creating jobs; increased safety on the roads and reduction in accidents; reining in input costs for industries such as automobile, steel, electronics, white goods etc and increase in GST (goods and services tax) collection.
So, how does the Government make it happen? What are the possibilities? Will the intended outcomes flow?
Currently, there are 5100,000 vehicles in India which are older than 20 years, 3400,000 vehicles more than 15 years old but < 20 years and 1700,000 older than 15 years, but without renewed fitness certificate. Based on the premise that vehicles > 15 years are considered to be more polluting and less fuel efficient, the policy architecture is founded on two major pillars viz. incentivize owners of such vehicles to scrap and dis-incentivize hanging on to them.
If, the owner decides to scrap, he/she will get 4-6% of ex-showroom price of the new vehicle as compensation (call it scrap compensation); 5% discount on purchase of the new vehicle; road tax rebate by state governments @25% for personal vehicle (generally, the tax being levied @4% of the vehicle value, 25% rebate comes to 1%) (for commercial vehicle, the rebate proposed is 15%). The policy also moots waiver of the registration fee for new vehicle purchased on production of ‘scrap certificate’ issued against scrapped vehicle.
As for the disincentives and penalties for hanging on to the old vehicle, the policy suggests hike in fee for renewal of registration (for a car more than 15 years old, the owner will have to pay Rs 5000/- up from Rs 600/- at present) and fitness certificate renewal fees, stiff penalties for delay in renewals and imposition of the so called ‘green tax’ by states on such vehicles. All personal vehicles will have to undergo mandatory automated fitness test after 20 years to ply on the roads while commercial vehicles will have to pass the test after completion of 15 years. If, they don’t, those vehicles will be de-registered and will be impounded by the transport authorities, pronouncing it as ‘end of life vehicle’.
Will the package drive owners towards scrapping? Consider a car valued at Rs 800,000/-. If, the owner goes for it, the he is promised a total benefit of 11% including scrap compensation of around 5%, discount 5% and 1% rebate in road tax. This is Rs 88,000/-. Against this, he can easily realize at least @15% or Rs 120,000/- by selling it of course subject to it being fit. So, instead of scrapping, he will sell.
Of the total incentive of 11%, the onus for paying 10% (5% scrap value and 5% discount) is on the automobile manufacturers whereas the 1% relief in road tax has to come from the states. While, for the former, a lot will depend on individual firms, their cost dynamics and willingness to offer concession, the latter are unlikely to give the intended relief (given their precarious finances, they won’t let go a major source of revenue). If, the intended incentive does not materialize, the owner will be further discouraged from going for scrap.
A third scenario is one in which the owner neither sends it to the scrap yard nor sells; instead, he retains it after renewing the registration. A person whose resource position is pretty tight will go for it. Even the increased re-registration charges and imposition of green tax won’t deter him/her from choosing this option.
Even so, there is no immediate pressure on vehicle owners to comply with the policy norms. Barring more than 15 year old vehicles owned by the Government or its agencies/undertakings, panchayats and state transport undertakings etc which have to be mandatorily scrapped from October 1, 2021, for private vehicle owners, insistence on compliance is still 2-3 years away. For instance, a non-commercial vehicle will have to go for a fitness test only in June 2024.
On balance therefore, the policy may not generate the required incentive for vehicle owners to dump aged vehicles on a large scale. However, the scale could tilt in favor of scrapping if the GST (Goods and Services Tax) Council accedes to the request of Nitin Gadkari for exempting new vehicles purchased against scrapped old vehicle from levy of GST. At present, automobiles attract tax @28% and any relief from this will give a big boost. But, the million dollar question is whether – given the huge revenue implications – will states (for that matter agree Union Government) agree?
At another level, there is an order of the Supreme Court (2015) validating a National Green Tribunal (NGT) directive that prohibited diesel cars older than 10 years and petrol vehicles older than 15 years from plying on the National Capital Region (NCR). This order is not just a negation of the extant law which provides for renewal of the registration of a petrol car for a further 5 years (on completion of initial 15 Years) but also presumes that all such cars become unfit for plying on roads after completing 15 years from the date of first registration.
Such a sweeping order has devastating economic consequences for millions of owners whose vehicles are fit to run and yet, they are forced to scrap it or go for desperate sale. Imagine the plight of a person who took a loan to finance the purchase and has completed the arduous process of repaying the previous loan. If, the SC does not revisit its order, he will have to go for a fresh loan.
Even as the policy lays emphasis on fitness, rather than the age of a vehicle and is structured around incentives/disincentives, the court order militates against this in so far as the NCR region is concerned. In fact, the core of the policy is rendered infructous by the SC order. It also creates an anomalous situation whereby vehicle owners in NCR region have no other option left but to scrap their vehicles after 15 years, those in other states have a freedom of choice.
To address the anomalous situation created by the SC order, the Union Government will need to make necessary amendment in the Motor Vehicles Act (MVA) that prescribes fitness of the vehicle to be the sole criterion – irrespective of its age – for determining whether it is allowed to ply on the road. As regards, scrapping of old and making way for new more fuel efficient and less polluting vehicles, the policy makes the right moves but the incentives need to made more attractive. Giving exemption from GST could be the way forward.