The government on Thursday announced details of a voluntary scrappage scheme for vehicles older than 15 years in the country with a mix of incentives for consumers who opt to do away with their old cars and disincentives for those who choose to stay on with them.
In the scheme, which would effectively come into force only from June 1, 2024 when fitness tests will become mandatory for most cars and SUVs, the Ministry of Road Transport and Highways has advised automobile manufacturers to provide a 5 per cent discount on the purchase price of a new car for anybody who buys them after scrapping the old vehicle.
Similarly, it has also asked state governments to waive off registration fees on the new vehicle. This will be on top of the scrap value of the old vehicle, which could be anywhere around 4-6 per cent of the ex-showroom price of a new car. For heavy commercial vehicles, fitness tests will become mandatory from April 1, 2023.
Mindful that these incentives may not be enough, Road Transport Minister Nitin Gadkari has also requested Finance Minister Nirmala Sitharaman to consider a GST cut for such vehicles. The finance ministry has not responded to the request yet.
"I have asked for some GST concession from the finance ministry for new vehicles that are bought in lieu of any old vehicle that is scrapped in the country," Gadkari said. "It will be an added incentive. The finance ministry is looking into this request but there is no decision yet."
A long-standing demand from the industry, scrappage policy is being seen as a win-win solution that will give an impetus to new vehicle sales, improve air quality as older vehicles are more polluting than new ones and reduce the import bill for crude oil for the country as new vehicles consume far less fuel. At the same time, Gadkari's ministry has already proposed steep increase in cost of fitness certificates for vehicles older than 15 years as a disincentive for consumers to keep their old cars on the road.
"Please do not see this as an anti-poor move, instead it is pro-poor," he said. "New cars are safer, more fuel economical and less polluting so whichever way we look at it, it will only benefit everybody."
According to the ministry, there are around 51 lakh light motor vehicles in the country that are older than 20 years and 34 lakh of them are older than 15 years. On top of this there are around 17 lakh medium and heavy commercial vehicles that are plying without fitness certificates. All of them can potentially be scrapped.
"The new Voluntary Vehicle-Fleet Modernisation Program, also called the Vehicle Scrapping Policy, can help in three ways: one, lower the cost of passenger vehicles by 8-10% for most segments; two, afford replacement of older, more-polluting passenger vehicles; and three, increase the availability of key raw materials such as steel, copper and aluminium, which can be recycled to lower the cost of production of new vehicles," says Anuj Sethi, Senior Director, CRISIL Ratings.
The ecosystem around scrapping and issuance of fitness certificates is expected to attract investments of Rs 10,000 crore and create 35,000 job opportunities. There are around 26 model smart fitness centres currently and the country would need at least 49 more, a senior road transport official said.
The biggest question however is how well the scheme is implemented and executed in the country given that it is still voluntary in nature.
"Undoubtedly, this will give a boost to auto sales especially CV sales and is a step at right point when the economy is bouncing back from COVID-19. However, one needs to see the fine print of policy as the devil lies in the details. Five percent of rebate on new car purchases is an indeed welcome step but the key lies in framing the right rules and putting standard operating procedures for testing, payments, and grievance redressal," says Preetam Mohan Singh, Senior Vice President, Automotive, Praxis Global Alliance. "How will the provisions of green taxes be implemented and monitored, how will the new testing centers to be set up under PPP mode are important issues as the success of the program is directly linked to the execution of policy."