Premium car makers which do not produce models locally, but assemble these in India are busy exploring ways to avoid a price rise in the wake of the government's new duty structure.
Daimler AG, which makes luxury cars under the Mercedes-Benz brand, BMW, and the Volkswagen brands such as Audi, SkodaAuto and Volkswagen are said to be considering improving localisation levels and fine-tuning imports.
All these are affected by the significant change in the customs duty structure imposed on some of their volume generating models.
The finance ministry had raised the duty on engines, transmissions and gearboxes assembled outside India and later mounted on models put together here.
The ministry had raised the customs duty on such engines, transmissions and gearboxes to 30 per cent from the earlier 10 per cent. This took effect from April 1.
The Society of Indian Automobile Manufacturers had approached the government to extend implementation of the new rule by 18-36 months, saying companies needed time to respond to the change. The finance ministry is yet to respond.
However, no company affected has so far raised prices.
A senior technical expert agreed it was possible to separate the engines, transmission and gearboxes into two or more parts before being brought to India.
Doing so would qualify for the concessional customs duty of 10 per cent.
BMW seems to be trying this argument. "Our stand is that we are fulfilling all the norms as required for meeting completely knocked down (CKD) rules. BMW India is not importing any fully built engines, transmissions and gearboxes," stated a spokesperson.
BMW India is the leader in the Indian premium car market, posting a growth of 80 per cent last year with sales of 7,079 units.
The spokesperson clarified there'd be no price rises in the cars produced in India through the CKD route.
Sources say it is looking to procure more parts locally. A new engine and transmission facility is also not ruled out by the company at Chennai, next to its existing CKD facility, where it makes the 3-series and 5-series luxury sedans, as well as the X1 sports utility vehicle.
Daimler is contemplating raising the price of the Mercedes-Benz S Class, a top-selling luxury saloon. A final decision is still to be taken by the German manufacturer.
The S Class is priced at a little over Rs 80 lakh and sells around 500 units annually. As compared to the C and E Class engines procured from Pune-based Force Motors, engines for the S Class are imported.
Another German company, Volkswagen, is yet to decide on whether to raise prices of its cars or to have an engine facility in the country.
An email to the company seeking clarity remained unanswered. An Audi spokesperson stated that discussions were on.
Sources say Volkswagen cannot risk passing on the rise in duty to its customers, due to intense competition from Mercedes and BMW.
However, the raise in duty will be too significant to bear without some change, stated an industry source.
The Volkswagen group imports fully built engines to mount on models such as the VW Jetta and Passat, Skoda Laura, Superb and Yeti, and the Audi A4, A6 and Q5.