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Googly For Auto Industry

In the midst of a prolonged slump in demand, high inventory coupled with the need to liquidate all BS IV vehicles before March 31, 2020, the temptation to reduce prices ahead of the festive season is high

Googly For Auto Industry

Photograph by Shekhar Ghosh

After nearly a month of uncertainty over a GST cut for cars, which ultimately came to naught, the domestic automobile industry is in a dilemma on whether it can or should pass on part of the benefit of reduced corporate taxes to consumers as heavier discounts. In the midst of a prolonged slump in demand, high inventory coupled with the need to liquidate all BS IV vehicles before March 31, 2020, the temptation to reduce prices ahead of the festive season is high. But clarity on whether there is ground for this is not there.

Companies with a significant commercial vehicle portfolio like Mahindra and Tata already pay less taxes - 24.17 and 15.77 per cent, respectively - than the reduced rate of 25.17 per cent announced by Finance Minister Nirmala Sitharaman on September 20. Passenger vehicle makers are in the middle; Maruti Suzuki's tax in fiscal 2019 was 28.33 per cent. So, there is room for some reduction. Maruti has cut prices by Rs 5,000, but only on select slow moving models. Others are unlikely to follow suit.

Two-wheeler companies pay significantly more taxes-Hero MotoCorp and Bajaj paid 32.45 and 31.88 per cent, respectively, so the elbow room is more.

With BS VI norms due to take effect from April 2020, cost of producing vehicles would go up. Therefore, some companies may not pass on the tax benefit now but also not hike prices at the start of the next fiscal. Companies would have to mandatorily pass on a GST cut. But a corporate tax cut is a googly that has only befuddled an industry that is already hurting.

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