Here’s an example of how this works. You scrap your 15-year-old car, which is at the end of its operational life, at an authorized scrapping yard, also called as registered vehicle scrapping facilities (RVSF). You get two things—a certificate of deposit and, say, about ₹20,000 for the value of the car.
Then, you sell this certificate at a government-backed online platform—DigiELV.com—to the highest bidder, which could be a new car buyer or even a dealer. A certificate typically trades for around ₹20,000-35,000, as per industry estimates. So, you end up making about ₹50,000 for your old car.
Next, the person who buys the certificate from you buys a new car—say, a luxury car costing ₹1 crore—in Rajasthan, where the scrapping certificate attracts a 25% rebate on road tax. The road tax, which is 10% in the state, is thus reduced by ₹2.5 lakh, effectively becoming a discount for the buyer who bought your certificate for just ₹30,000. If the buyer is a car dealer, he offers to sell this certificate further to potential customers at his dealership to woo them with this added benefit.
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There are no restrictions on the value of the vehicle being scrapped and the new one being purchased, giving rise to an arbitrage opportunity – a scrapped old budget car can be used to get discounts on a swanky new luxury car. This is increasing the value of the certificates of deposit and incentivizing the scrapping of old vehicles, according to experts.
To be sure, the road tax rate as well as the rebates on scrapping certificate vary from state to state. The benefits are part of the Vehicle Scrappage Policy floated by the ministry of road transport and highways in 2021. The road tax concessions under this scheme are offered by states at their discretion.
“This is a win-win situation. The person who is selling their old car makes more money. The person buying the certificate gets a good discount,” said Sachin Haritash, managing partner of Quick Scrap, a Dharuhera-based RVSF.
Often, scrapping yard operators themselves purchase the certificates from vehicle sellers and then sell them onwards to new car dealers after adding a margin. The dealers then use these certificates to woo new car buyers with additional discounts.
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“Smart dealers are buying certificates and keeping them. When a customer walks in, they offer these certificates to them for an extra discount,” said Nikunj Sanghi, the owner of a leading Rajasthan-based vehicle dealership and the past president of Federation of Automotive Dealers’ Associations (FADA).
How trading helps the scrapping concept
Trading of certificates bridges a very fundamental gap in the scrapping ecosystem, and allows organized players to take on the unorganized market at a more even keel.
Typically, people using 15-year-old cars tend to have bought these second-hand, according to Sourabh Agarwal, director of Jaipur-based Ganganagar Vaahan Udyog, another RVSF.
After scrapping their old vehicles, these customers tend to opt for another second-hand vehicle, Agarwal said. In such cases, certificates of deposit are of little use to them as rebates on road tax come into the picture only when a new vehicle is being purchased.
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This is where the trading of certificates helps, he said. “Trading is the lifeline of this industry,” Agarwal said, adding that trading of certificates of deposit is also bridging the gap between the organized and unorganized vehicle scrapping market.
The organized players, or RVSF operators, have to pay taxes and comply with several environmental guidelines, raising their cost of operations compared to the unorganized market. Due to this, the unorganized players are able to offer a higher price for scrap, making RVSFs unviable. But with the additional income from the trading of certificates, the balance tilts in favour of the official market, he said.
Values differ from state to state
To be sure, the quantum of benefits varies from state to state. The highest benefits are in states like Rajasthan, Assam, Chhattisgarh, Kerala, Jharkhand and Himachal Pradesh, which offer a flat 25% rebate on road tax of new vehicles. The road tax in these states varies between 9% and 14% of the vehicle’s ex-showroom price, which translates to a rebate of ₹2.25-3.5 lakh on a car that costs ₹1 crore ex-showroom.
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Karnataka and Punjab also offer a 25% rebate on road tax (18% and 12% in their respective states) but have capped the maximum benefit at ₹50,000 and ₹75,000, respectively. Puducherry, which has a has a flat road tax based on the price of new vehicles, has capped the benefit at ₹11,000.
Haryana offers only 10% rebate on road tax with a cap at half the scrap value of the old car. Tamil Nadu, Manipur, Arunachal Pradesh, Meghalaya and Tripura offer 4-6% rebates on the ex-showroom price of the new vehicle.
