Auto cos breathe easy

Finance Minister Pranab Mukherjee’s Union Budget 2010 came as a positive for auto companies.

With the government keen on increasing its tax base, it decided to hike the excise duty by 2% — to 10% from 8% earlier. The industry, however, was expecting the duty hike and some quarters had expected a 4% hike.

The FM’s announcement thus came as a relief to the sector. At 12.30 pm, auto stocks like Maruti Suzuki , Tata Motors and Ashok Leyland were up between 2% and 5% on the BSE in a strong market that was up 2%.

The auto companies may pass on the hike to customers with a minor price hike, which may weigh down too much on sales.

Another minor positive for auto companies was the weighted increase in research and development (R&D) exemption — though the pharmaceutical industry is the main beneficiary of the move.

The FM also re-iterated his aim to implement the ambitious direct tax code (DTC) and the goods and service tax (GST). Both tools, which would overhaul the country’s tax system, are to be implemented by April 2011, he said. The GST aims to bring other taxes like excise, VAT, CST and other taxes under one umbrella and the GST rate may be lower than the combined total of the current taxes.

India’s auto sector has seen rapid growth in the past few years. This financial year, car and motorcycle sales grew at their fastest ever, and second only to China in the world.

The hyper growth in the sector was also aided in part by the stimulus packages (excise duty cut from 14% to 8% and slashing of interest rates) that the government had unveiled in late 2008 and early 2009 when sales slumped.

FM says, weighted deduction reduced from 150% to 200% for in-house R&D, which is positive for auto companies. TVS Motor, Tata Motors, Bajaj Auto, Ashok Leyland, M&M, Hero Honda and Maruti rallied 4-6.7%.