Corporate tax rate cut may not benefit auto buyers, say analysts

Tax cut may not translate into a price cut for auto buyers as companies have been taking a hit by doling out discounts and incentives to boost sales in a dull market

Buyers of automobiles are unlikely to benefit from the reduction in corporate tax even though the move is expected to bring some relief to auto companies that have been bruised by a prolonged slowdown. And with its calls for a cut in the goods and services tax (GST) rates on autos rejected, companies will have to find their own ways to tide over the sales slump and re-kindle demand.

Top officials at various auto companies conceded that the corporate tax cut announced by Finance Minister Nirmala Sitharaman last week will increase their cash in the books. However, it may not translate into a price cut for auto buyers as companies have been taking a hit by doling out discounts and incentives to boost sales in a dull market.

“It’s an extremely positive move by the government and will attract new investment. But I can’t tell if there will be a reduction in prices for customers. At Maruti Suzuki, we will see the impact of the cut on our balance sheet and take a call in two or three days,” RC Bhargava, chairman at Maruti Suzuki, said.

Vikas Jain, National Sales Head at Hyundai Motors India, echoed similar views, pointing out that poor demand had prompted companies to go for sharp production cuts. Hence, a price reduction was not on the cards. 

“There has to be an overall uptick in demand for companies to reduce price. Expense has been high for all as industry has tried to boost demand by giving incentives to customers and dealers even as plants are functioning at two-thirds capacity,” said Jain.

In a last-ditch attempt to revive sales ahead of the festive season, passenger vehicle makers have come out with an array of attractive offers on their models. Maruti is offering benefits of up to Rs 100,000, Hyundai has lined up incentives worth up to Rs 95,000 and Honda Cars India up to Rs 400,000 on select diesel models. The sales push is prompted also by the switchover to BSVI emission norms that take effect from April 1, 2020, after which automakers cannot sell or produce vehicles not compliant with the new norms.

On Friday the Finance Minister slashed the corporate tax rate for large domestic companies to 22 per cent from 30 per cent (without incentives or exemptions). She announced a further cut in the tax rate to 15 per cent for new manufacturing companies in India (without incentives or exemptions) The Minimum Alternative Tax (MAT) will not be applicable when adopting corporate tax under the new provision.

Industry insiders say that the reduction in corporate tax by the Centre should be matched by the state governments, which need to reduce the taxation on raw materials and infrastructure such as electricity. 

“For the benefit to be passed on to the consumer, the state governments should take a cue from the Centre and reduce their taxes,” Maruti’s Bhargava said.

Vinod Aggarwal, managing director at Volvo Eicher Commercial Vehicles (VECV) said that with the “blood bath” (steep discounts) in the truck market, there was no scope for a further price reduction. “Transporters will not buy new trucks merely because they are cheap. The decision is based on the overall economic activity and business,” he said. 

The lower corporate tax may help the parent company Eicher Motors, but not VECV as the company has a  large capex requirement, he added.

And now that the call for rationalising the GST in the auto sector has been rejected, companies will have to find their own ways to tide over the slowdown, said Rajan Wadhera, president, Siam (Society of Indian Automobile Manufacturers). 

“The auto industry was very hopeful of a GST reduction,” he said. While Wadhera welcomed the move to reduce the compensation cess in 10 to 13-seater vehicles, he pointed out that the “demand has been partially met,” as the industry had been asking for a full exemption of the cess.  

Siam has been lobbying for a rate cut on GST from the current 28 per cent to 18 per cent to revive sales. Auto industry sales, which have been declining for a year, touched an over two-decade low in August, heightening the demand for a policy intervention.   

Back on track?

• Analysts expect the measures will boost sentiment and improve sales by year-end 

• Discounts in car market already at a historic high

• Companies unlikely to pass on the benefits of lower tax

• In the absence of a GST cut, companies to find ways to boost sales