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Charts & Analysis

Auto Sales Down in March: Don't read too much into it

Tata Motors has release monthly sales figures for March 2007. The sales are up “only 11%” – the “only” being a matter of concern, some think.

But there’s a perfectly valid reason, according to me. Depreciation.

Indian law allows assets bought between April and September the FULL depreciation for the year (financial year April – March) and those bought from October to March only half of it. Even individuals who are professionals or file taxes for business income can claim depreciation.

What does this mean? For companies and individuals with business income: If you buy an “asset”, you must depreciate the cost over years, unlike expenses which are wholly deductible in the year. Meaning, if you buy a car for 10 lakhs, you have to account for the expenses say 300,000 in the first year, about 200,000 in the next and so on. The IT department releases depreciation percentages of various types of assets every year. If you lease a car, the cost of leasing is directly deductible as expenses – if you spend Rs. 30,000 a month on the lease, Rs. 360,000 is allowed as an expense.

And before you head out to buy or sell your cars, note that this is not allowed for people without business income, i.e. not for salaried employees.

So in the context of vehicle purchasers, they get full depreciation (say 30%) for a vehicle bought in April, but only half of it (15%) for vehicles in March.

March sales are always going to be lower for Tata because its largest sales are commercial vehicles, and among passenger sales too, cabs are significant (they even have a special vehicle branded for taxis – called the Indicab). Depreciation effect is perhaps the worst in March and October, reflecting accordingly in Tata Motors sales. Also Ashok Leyland, another commercial auto manufacturer, has 3% lower sales (YoY) in March.

And the quote of 33% decline in exports is a misprint.

Exports in the month, however, declined 33 per cent at 6,299 units as against 6,508 units in the same month of previous year, it said.

That, according to my rudimentary math, is a 3.2% decline. Nothing that’s major, really.

Note: Auto sales may be lower this next quarter because of increased interest rates. The effect of that was not in March, though.

  • Anonymous says:

    >Hi Deepak,
    Can the depreciation be claimed on a pro-rata basis or straight away 15% irrespective of whether you buy it in October or March.Because I have heard that lot of businessmen ,just to avoid tax buy trucks in early March and depreciate their costs for that financial year when they file the income tax returns.While in April , they again depreciate the cost for that particular year and sell the trucks to some other party at the depreciated value and take the rest amount in black while giving a very nominal discount.It becomes a win-win situation for both the parties as it helps them not only in saving tax but rotating the black money.
    Hope,I am making myself clear.What say on this?

    Regards,
    Anshul

  • Deepak Shenoy says:

    >I think it’s not pro-rata – it’s just a single deduction regardless. But if you sell, it’s pro-rata to the time you sell.

    You’re right – that is a tax loophole, but then taking money in black is not legal – and for illegal things there are a gazillion avenues, aren’t there.