Financial Daily from THE HINDU group of publications
Friday, Jul 09, 2004
Industry & Economy
Smooth ride for tractors
The Finance Minister announced that excise duty on tractors would be reduced from 16 per cent to nil.
The components captively consumed in the manufacture of tractors have also been exempted from excise duty.
According to Mr R.C. Jain, President, Tractor Manufacturers Association (TMA), and Chief Executive - Group Affairs, Eicher Group, the overall emphasis on the agricultural sector bodes very well for the tractor industry.
"The reduction in excise, emphasis on increasing availability of credit, as well as the focus on developing rural infrastructure are very encouraging steps for the industry," he said.
While stating that the excise benefit will be passed on to the consumer in the form of end price reductions, Mr Jain cautioned that with the input excise aggregate now amounting to about 12 per cent, the net benefit for the companies may only be in the region of about four per cent.
Mr Rakesh Chopra, Business Head-Agri Machinery Group, Escorts Ltd, while stating that the actual benefit of the excise cut on tractors may be in the region of 4-5 per cent (which would be passed on to the consumer), said that the soft stance of the Budget vis-à-vis the agricultural sector would help encourage demand for tractors.
Incidentally, companies making parts in-house are likely to benefit more from the excise provisions.
Ms Mallika Srinivasan, Director, Tractors and Farm Equipment Ltd, said the general thrust as far as agriculture is concerned is welcome as this is a long neglected sector. Our industry has been languishing for the last three years.
As far as excise duty on tractors is concerned, we are not yet sure what the implications are.
We will have to wait and see till a clearer picture emerges on whether this excise duty cut will translate into full benefit for customers. We are unclear yet on whether inputs are also exempt from duty.
If that does not happen, then the benefit to customers will not be much. By only reducing the excise duty on the final product, there will be only a maximum reduction of 3 per cent to 4 per cent on the product as the weighted average of input duty will be in the region of 12 per cent. There is, therefore, a large gap between 4 per cent and 16 per cent benefit.
However, if they have exempted input materials also from duty, then it will have a significant benefit in terms of price to customers and that will really expand the market.
Mr Kamal Bali, Managing Director of Same Deutz Fahr India, felt that the net benefit, taking into account the excise on inputs, could only be in the region of about Rs 3,000 per tractor.
The exemption from excise duty extended to tractors will not lead to a commensurate 16 per cent reduction in the prices of tractors at the retail level.
The non-availability of Modvat credit after tractors are fully exempt from excise duty will go on to add to their cost of manufacturing. So, to the extent that the tractor manufacturer depends on outsourced components, the cost of assembling the tractor will be higher.
Similarly, the higher the proportion of in-house components, the lower the cost of the tractor, since excise duty will not be payable on those components, in addition to the full exemption from excise duty available for the fully built tractor.
For example, the net effect of the proposed excise duty exemption and the non-availability of Modvat credit could work out to a final reduction in prices of only 4 per cent for companies such as Eicher Ltd. The final effect could be lower due to a 12 per cent excise duty outgo on outsourced components, which cannot be claimed back in the form of Modvat credit.
The Budget's proposals to exempt tractor components that are manufactured and consumed in-house from excise duty will help the organised tractor manufacturing sector and may not be beneficial for those in the unorganised segment.
The industry should also have much to cheer about from the rural, pro-farmer focus of the Budget.
The proposals to boost farm credit and increase credit delivery for the farm sector during the next three years could also have a beneficial impact on tractor sales.
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