It was a desperate move to bridge the fiscal deficits of the states that may now boomerang on the total revenues flowing into their coffers. In January, when the states introduced a uniform sales tax under four slabs (at 4, 8, 12 and 16 per cent), apart from two special rates (at one per cent for bullion and gold and 40 per cent for liquor), they did so with trepidation and a little greed. Fearing that they could lose out on revenues under the new simplified slabs, they went ahead and moved most items to the highest rate being charged by any of the states, rather than settling for average rates.
The result was a hark back to Nehruvian socialism when any consumer durable fell under luxury goods. Until last year, most states were charging an 8 per cent sales tax on automobiles. Now they attract 12 per cent. And engines with higher capacity attract higher taxes (which are more than the standard Central sales tax of 3 to 4 per cent, varying with the size). The result: commercial vehicle makers are badly hit. The same treatment has been meted out to televisions, refrigerators - almost all electronic goods. Today, the durables industry is groaning under increased sales tax liabilities. In automobiles, electronics and white goods in particular, bottomlines have sunk and marketshares eroded by 30 per cent.
KNOCKED DOWN
Remarks Maruti's marketing chief Rohtas Mall: "A Rs 20,000-25,000 increase in the price of a car is a lot. It hit the Maruti 800 segment first because it is extremely price-sensitive. Now sales in the Zen, Santro and Matiz segment have also been affected." Mall should know. Maruti, which was forced to cut prices of three models - the M-800, Omni, and Wagon-R - because of low sales in May, continues to be in shock. Figures for June showed a near-half (46 per cent) drop in marketshare from a high of 74.6 per cent a year ago. Sales dipped by 34 per cent to 15,898 units, especially of its two new offerings, Wagon-R and Baleno, as also the base 800 models.
In the case of two-wheelers, the average man's market, sales tax rates averaged around 8 per cent before shooting up to 12 per cent. According to figures compiled by the Society of Indian Automobile Manufacturers (siam), Bajaj Auto's sales in June this year plummeted to 30,992 units compared to 46,144 in June last year. Similarly, lml's sales dwindled to 14,029 units from 24,119 last June, while Escorts-Yamaha sales went down to 12,938 compared to 18,276 in the corresponding period. The only silver lining was Hero Honda which managed to increase its sales to 82,280 last month from 52,645. "Tension will continue unless the rates are averaged," adds a siam official.
Can anything be worse? Yes, say commercial vehicle-makers. Laments S. Sandilya, chairman and chief executive, Eicher group: "The rates have increased because rationalisation has been done at a higher level instead of the average rate." He cites the example of the truck industry for which sales tax in Delhi has gone up from 6 to 12 per cent, in Gujarat from 5 to 12 per cent and in Chandigarh, for some weird reason, from 1.1 per cent to as high as 12 per cent. And are price differentials among various states causing tensions for the manufacturers? You bet. "Some customers are still holding back expecting the sales tax to return to the old rates. This has certainly affected the buying sentiment in the market," says Sandilya.
The much-hyped recovery in the commercial vehicle market early this year has turned out to be a damp squib - one doesn't know whether the recovery was nipped in the bud by the sales tax hike. Since March, sales have dived almost 25 per cent with both manufacturers and finance companies grappling with low demands, high defaults and delayed credit periods. Of course, other factors like the recent hike in diesel prices and a drop in freight rates, a key indicator of economic growth, on major truck routes also had their role.
According to org-Marg figures, sales of medium commercial vehicles (2-axle) have been the worst hit. On the Delhi-Mumbai route, freight rates have dropped from Rs 1,400 per tonne in January to
Rs 1,000 per tonne in July, while it is less than Rs 400 (from the earlier rate of Rs 550) on the crowded Mumbai-Ahmedabad route, all because of huge unused fleet and high operational costs.
In the North, however, sales tax hikes are squarely to blame for deferred purchases. For example, sale of medium and heavy commercial vehicles (m&hcv) at Tata Engineering (telco) was 3,760 units during January to March this year compared to 3,828 in the corresponding period last year. Light commercial vehicle (lcv) sales were also down at 4,310 units compared to 4,841 over the same period. telco, it's learnt, is now focusing on retail sales for individual customers to push volumes.
It's the same hard-luck tale in the colour television market which had grown steadily over the past couple of years. As per sales figures for May this year, the number of colour television (ctv) sets sold in the country fell to 3.58 lakh compared to more than 5 lakh units in the corresponding period the previous year.
Predictably, the slump took a major toll on all ctv manufacturers. For instance, bpl registered a near one-fourth fall in its sales, both in terms of its topline and bottomline brands. "Sales tax is one reason, but another reason is the lack of external demand factors (like World Cup cricket in 1996 & 1999, World Cup soccer in 1998). We'll soon have the Sydney Olympics but that is not something for which people would go and buy a television set," says bpl corporate brand management head Anand Narasimha. He is hopeful, though: "The situation would definitely improve during the festive season starting September."
Narasimha and his counterparts in consumer durable and auto companies could be expecting too much. Analysts fear that the dip in sales could continue throughout the year. And, definitely, there would not be a return to the dramatic sales figures witnessed in previous years - the last three years have seen sales rising at a 25-30 per cent clip. Right now, most television sets are being sold through attractive finance packages offered by dealers or by the dealer-manufacturer combine. Francis Kanoi Marketing Research, one of the country's leading research agencies on consumer durables, recently published a detailed report which said the ctv market would continue to be affected by poor sales because of sales tax rationalisation. What is worse, say analysts, unless the government comes out with a sales tax reduction, ctv and most other consumer durable markets won't grow beyond 8 per cent.
Worse still, lower slabs won't come back. Bibek Debroy, research director at Rajiv Gandhi Foundation, says: "Any rationalisation of sales tax is a move towards a uniform value-added tax (vat) system across the country. But if you ask logically, no, you cannot have a Centre-determined vat. At the same time, it will be difficult to discipline a state-level vat."
Adds Debroy: "The government is now contemplating reducing sales tax by one per cent. But since it's a shared tax, the Centre can take this decision only if all the states agree. Honestly, I do not think vat would be completed by 2001." That's the deadline states agreed to last week, 10 years after former finance minister Manmohan Singh made uniform vat a part of the government's economic reforms agenda. Will the government reduces sale tax by one per cent? Will that help? Desperately seeking revival, industry could do even with small mercies.
