On Friday September 20, Finance Minister Nirmala Sitharaman announced a slew of measures to boost the nation’s ailing economy: reducing the corporate tax rate to 22%, making the effective rate 25.2%; incentivising manufacturing by setting the tax rate for manufacturing companies at 15%, making it an effective 17.01%; and not charging foreign portfolio investors surcharge as per the Finance Act, 2019.
Corporate tax cuts
India’s new corporate tax rate now compares well to the global average of 23.79%, making it a more competitive economy. This, reduction in the tax rate, however, comes at the price of certain pre-existing tax incentives, with companies having to choose between keeping the previous incentives and sticking to the old rate, or giving the incentives up and being taxed at the new rate. While the corporate tax cuts did provide a jolt to the markets, the move is going to set the government back by ₹1,45,000 crore in revenue, and might hamper the nation’s ability to meet the fiscal deficit target.
The state of the automotive sector
The data presented above paints a clear picture of how India’s automotive sector is faring. With sales declining for the tenth straight month, the sector is facing the worst time it has in the past two decades. The sector contributes 7% to India’s GDP, and higher prices coupled with buyers’ inability to pay is driving sales down.
In August, the sale of commercial vehicles dropped by 39%, personal vehicles by 32% and two wheelers by 22%. In dire straits, the automotive sector continuously beseeched the government for some relief.
No automotive sector GST cuts
The last meeting of the GST Council in July saw a reduction of the tax rate on electric vehicles from 12% to 5% and on chargers/charging stations from 18% to 5%.
This time around, multiple sectors saw the GST Council reduce GST rates, but in spite of vehicle sales hitting an all-time low, there were no automotive sector GST cuts. The industry had long been asking the government for a reduction in the GST on cars from 28% to 18%, but officials from the council stated that doing so would lead to a huge loss in revenue (₹50,000 crore).
The auto components industry too, with 60% of auto components being taxed at 18% and the rest at 28% asked for a uniform 18% on all components. The council in response remarked that if rates were cut, ₹22,000 crore out of the estimated ₹50,000 crore loss in revenue would be from auto components.
Will the corporate tax cuts benefit the automotive sector?
With no automotive sector GST cuts, can corporate tax cuts help ameliorate the sector’s condition? In spite of no announcements of GST cuts, automotive stocks did well after the announcements, owing to the corporate tax cut, which is set to save them a sizeable amount of money. Stocks of many automotive sector companies did well post the announcement. The stock of Maruti Suzuki bore witness to the biggest single-day rise in over seven years, closing 11% higher than it started. Ashok Leyland’s stock was up 19%, TVS Motors’ stock was up 14%, Eicher Motors’ stock was up 14 percent and Hero MotorCorp’s stock up 12%.
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Make in India: automobile industry
The reduction of effective tax for new manufacturing companies to 17.01% might be a shot in the arm for the automotive sector. This low tax for newly set up manufacturing companies coupled with one of the lowest corporate tax rates in Asia could also boost FDI. Additionally, the new choice afforded to companies to spend their mandatory CSR funds on incubation centres could mean that companies can invest in research and development by way of incubation.
Speaking at the India Today Conclave 2019, Maruti Suzuki India’s Chairman, RC Bhargava stated one of the main reasons for the crisis faced by the auto sector is Indian vehicles being expected to follow European emission standards combined with the inability of Indian consumers to pay higher prices.
With no respite in the form of GST rate cuts, two measures leave many in the industry hopeful: lowered corporate taxes, which will help companies save money, and reduced taxes for starting new manufacturing operations, which could boost FDI and revive the sector.
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