NEW DELHI : The prices of two- and four-wheelers manufactured by profitable automakers are likely to come down significantly following the corporate tax cut announced on Friday, just in time for the Navratri and Diwali festivals.

The automobile component manufacturing sector, which has been the worst hit by the yearlong downturn in sales, will also benefit from the move.

In order to boost consumption demand and increase spending from private companies, the Union government reduced corporate tax rate from 30% to 22%. The effective tax to be paid by the companies will be 25.17%.

The government’s move will also help companies to spend more in research and development (R&D) of products and other aspects of the business.

The tax cut will boost the sentiments of automobile companies facing their worst slump in more than a decade. Of the top five gainers on the benchmark NSE Nifty50, three were automobile companies. Eicher Motors Ltd was the top gainer, rising 13.38%, Hero MotoCorp Ltd ended the day 12.34% higher, and Maruti Suzuki India Ltd was up 10.54%.

Automobile companies exploring opportunities to manufacture in India will have to pay an even lower tax rate of 15%, provided they start their production by 31 March 2023. According to experts, the move will also help companies planning to invest in India to develop and manufacture electric vehicles. The effective tax rates on these companies will be 17.5%.

To boost research and development activities in India, the minimum alternate tax rate was also reduced from 18.5% to 15% for companies who want to continue availing incentives.

According to R.C. Bhargava, chairman, Maruti Suzuki India Ltd, high corporate tax has always been a major issue for companies looking to invest in India. “The Union government has sent two very important messages through today’s announcements," said Bhargava. “The first message is to resolve the immediate issues of getting out of the downturn and the second one is this tax cut has essentially put a lot of money with the companies. That extra money enables them to take various kinds of actions to pump demand for their products in the market."

Rajan Wadhera, president, Society of Automobile Manufacturers (Siam), also welcomed the bold move by finance minister Nirmala Sitharaman. “These are indeed landmark announcements and would certainly help in reviving growth in the Indian economy. These set of major tax reforms are a clear indicator of the government of India’s commitment to improving the business environment to give a definite boost to economic growth," he said.

Wadhera added that the move to widen the scope of CSR expenditure to include incubation centres and R&D activities will also help with R&D expenditures in the automobile sector.

The announcements come amid the slowdown in the auto sector. Six top auto firms had dispatched 171,193 vehicles to dealerships in August, 34% below the 259,925 vehicles recorded in August 2018.

Maruti Suzuki had also cut production at its three plants by 33.9% year-on-year to 111,370 units in August—marking the seventh straight months of a decline in production.