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Government's Vehicle-scrappage Policy May Hit Speed Bumps Without Clear Incentives

Image for representation. (Image source: Reuters)

Image for representation. (Image source: Reuters)

A good balance of disincentives for older vehicles and incentives for scrappage along with strict compliance can make the scrappage policy effective.

For years, the automobile industry has been talking up the benefits of an incentive-based scrappage policy to phase out older, more polluting vehicles. Such a policy would ensure scrapping of older vehicles so that vehicular emissions and pollution is lower; it would have also benefitted automobile manufacturers through improved sale of new vehicles and created more jobs in the sector through establishment of dedicated scrappage yards.

India’s vehicle makers have been urging the government for our own version of “Cash for Clunkers’ policy which the United States unveiled in 2009 and which was subsequently implemented in some other countries too. Under this policy, the government bought and scrapped older vehicles and also incentivised vehicle owners to purchase new vehicles through lower taxes. In some countries, cash was also handed out to people wiling to scrap older vehicles.

But the Indian version, which has finally emerged from the Ministry of Road Transport & Highways (MoRTH) this week, does not speak of any incentives. Instead, it additionally proposes an entirely new levy on older vehicles – both public and private, even public buses have not been spared. The only scrapping it speaks of is for vehicles owned by government departments and PSUs but this too is applicable only after 18 months and the contours of this limited scrappage policy too are yet to be decided.

This is the MoRTH proposal:

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** A ‘green tax’ on transport vehicles older than eight years, which would be between 10-25% of road tax. Road tax is anywhere between 8-14% of vehicle cost, varying across states. So for a vehicle which costs Rs 10 lakh, tax already paid would be Rs 80,000-1.4 lakh. Now, such vehicles will need to be registered again after eight years and the owners will have to shell out another hefty sum to continue using them.

** Personal vehicles 15 years and older could be charged the same tax but quantum has not been specified.

** Public transport vehicles, such as city buses, to also be charged at a lower, unspecified rate.

** Higher green tax (50% of road tax) for vehicles being registered in highly polluted cities. This would mean a rather hefty payment to continue using older vehicles in some geographies.

** Differential tax, depending on fuel (petrol/diesel) and type of vehicle.

** Vehicles like strong hybrids (which can run on both fossil fuel and battery), electric vehicles and alternate fuels like CNG, ethanol, LPG, etc, to be exempted.

** Vehicles used in farming such as tractors, harvesters, tillers, etc, to be exempted.

** Scrapping and deregistration of vehicles owned by government departments and PSUs was approved. Vehicles older than 15 years to be scrapped but policy yet to be notified and will come into effect from 1st of April, 2022. A majority of the vehicles owned by central and state government departments and PSUs are old and polluting so prioritising their scrappage is a good idea.

But what these pronouncements by the MoRTH show is mere intent; they still need approval from state governments. Nikunj Sanghi, Chairman of the Automotive Skill Development Council, said, “As a first step this is good but this needs to be followed up with a policy which is based on substantial incentives.”

The Modi government had first come out with contours of a scrappage policy in its first term. At that time, it had proposed ‘Voluntary Vehicle Fleet Modernisation Plan (V-VMP)’ for vehicles 10 years or older which would have impacted nearly 28 million vehicles. The proposal at that time was indeed incentive-based since it allowed vehicle owners to get scrap value from old vehicles, a special discount from automobile manufacturers for buying a new vehicle and partial excise duty exemption.

Though at no stage was a cash incentive being given to the vehicle owner, at least there were clear incentives in the entire scrappage chain.

According to the government's own estimate then, the incentives proposed would have amounted to 8-12% of total vehicle cost for owners. But the latest MoRTH proposal does not mention any incentive. In 2019, India had an estimated total vehicle population of over three hundred million vehicles. Nearly three in four were two wheelers, 7% were tractors and three wheelers, 11.4 million were commercial (3.7%) vehicles.

The main challenge of any scrappage policy has been identifying the stakeholder willing to bear the burden of incentivisation. An industry executive said the Centre asked vehicle makers to cough up some money since they were seen as the biggest beneficiaries of such a policy. State governments were also told to similarly come up with some sort of financial incentive as reduced road tax, relief on registration charges, etc.

“The Centre wanted to know what the industry and the state governments would be offering before drawing up an incentivisation policy. It would have then contributed to the total incentive package by offering lower excise of GST. But during stakeholder discussions so far, no one has been willing to commit to any substantial amount for incentivising scrappage," the executive said.

Unless the Centre defines clear incentive for owners of older vehicles, scrapping such vehicles will remain a pipe dream. An analyst pointed out that most of the old goods vehicles are being used in India’s hinterland, where the ability to buy a new vehicle is rather limited. A good balance of disincentives for older vehicles and incentives for scrappage along with strict compliance can make the scrappage policy effective.

first published:January 27, 2021, 16:43 IST
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