Pavethra Ponniah, vice-president and sector head, ICRA, said the ongoing weak demand conditions may prompt original equipment manufacturers (OEMs) to pass on some benefits of tax revision to the end consumer with lower product prices. This implies that the price correction in coming months will, to an extent, address the demand side issues, he said.
In a bid to boost consumption demand and increase spending from private companies, the government on Friday announced reduction in tax rates for corporate entities from 30% to 22%. The effective tax to be paid by the companies, including surcharge and cess, will be 25.17%.
Automakers exploring ways to start manufacturing in India stand to benefit more, as the corporate tax rate for new manufacturing companies were also cut from 25% to 15%, provided they start operations by 31 March 2023.
“ICRA notes that the current reduction of tax rates to globally competitive levels will incentivise OEMs and their vendors to increase localization, which augurs well for the industry. India imported auto-components worth $17.6 billion during FY20 (so far) and this is likely to increase further in FY21, given the transitionary phase towards stricter safety and emission norms that the industry is currently in the midst of," Ponniah said.
“Further, given the increasing US-China trade tensions, revision in corporate tax will attract FDI (foreign direct investment) in Indian manufacturing sector, as the revised tax structure is now in line with other emerging markets," he added.
India’s auto industry has been in the throes of nearly a year-long slowdown. Now, the cut in corporate tax rates raises hopes that companies will reduce vehicle prices to revive sales. During the financial crisis of 2008, automakers had passed on the benefits of excise duty cuts announced by the government to push demand.