Auto sector to lose tax sops in FY13

With state governments offering tax sops on investments, automobile firms have enjoyed relatively low tax rates over the last few years. On an average, tax rates for auto companies, which have set up facilities in tax-free zones, have declined from 28 per cent to 20 per cent.

In 2007, the government offered 100 per cent income tax exemption for five years and 200 per cent weighted average deduction on research and development (R&D) for investments in Uttarakhand. Other sops included a 10-year excise duty exemption and an income tax exemption of 30 per cent after the first five years.

However, this tax-free jamboree will soon end. According to Credit Suisse, with the benefits in Uttarakhand expiring, while the tax rates for Bajaj Auto and Tata Motors could rise from FY13, those for Hero MotoCorp and Ashok Leyland will be affected from FY14. The biggest beneficiary of the state’s liberal tax structure has been Hero MotoCorp, as 33 per cent of its total production comes from these tax-free zones. For Tata Motors and Bajaj, the tax-free zones account for 20 per cent of their total production. No wonder, Hero’s tax rate has nearly halved to 17 per cent from 31 per cent in the last five years. While Bajaj Auto’s income tax exemption expires in FY12, that for Hero and Ashok Leyland ends in FY13. Hence, from 26 per cent in FY12, Bajaj Auto’s tax rates will rise to 29 per cent in FY13.

Technically, Hero, too, should have been hit with the tax holiday ending, but, given that its research and development costs are expected to increase substantially, the company will benefit from the 200 per cent deduction on the same. According to Ambit Capital, Hero’s FY12 net earnings growth would be ahead of the Ebitda (earnings before interest, taxes, depreciation, and amortisation) growth, thanks to a step up in R&D expenses and lower tax rates, as production has increased at its Haridwar plant, which enjoys tax benefits. However, revenue and earnings growth is expected to moderate in FY13. Analysts say Tata Motors would also see tax rates rise from 17 per cent to 22 per cent, as the company manufactures its popular Ace model in Uttarakhand.