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Automobile sales registered a double-digit growth in June. Photo: Mint
Automobile sales registered a double-digit growth in June. Photo: Mint

Govt asks auto companies to cut costs, royalty payouts

  • Industry players believe a tax cut could help boost demand at a time the economy is struggling with a contraction triggered by the coronavirus crisis

NEW DELHI: Automakers should lower costs, cut royalty payouts to foreign parents and improve efficiency to decrease the purchase price of vehicles rather than expect the government to reduce tax rates, said a senior finance ministry official.

The official, who spoke on condition of anonymity rejected the suggestions from industry players Maruti Suzuki and Toyota Kirloskar Motor pointing to the tax structure on automobiles as a demand dampener.

Royalty payouts by some companies to their foreign associates have been a matter of tax disputes in the past. These hefty payments, a cost on the books of the local producer, also represent how auto companies have flourished under the domestic regulatory and taxation framework that offered predictability and certainty to businesses besides reasonable protection from imports, said the official.

“Companies should cut down their costs of manufacturing by cutting down the royalty payments to their parent companies abroad instead of asking the Government to reduce GST,“ said the official.

India’s tax policy on automobile has been quite consistent for the last three decades in the form of allowing foreign investment and incentivising the domestic manufacturing by providing reasonable protection from imports, said the official. Besides, India offered a lower corporate tax rate regime last year to new manufacturers and to companies that does not avail of any tax incentives.

Automobiles now attract 28% GST and a cess ranging from 1% to 22%. GST, a technology enabled tax system, has brought in transparency in taxation which highlights the total tax incidence on the final product, which was not so apparent in the earlier fragmented tax system involving numerous taxes including central excise duty, central sales tax, value added tax (VAT) and tax on services availed by the producer. GST rates on automobiles are less than what VAT and excise duty rates used to be in pre-GST era, and even with the cess, taxes have not gone beyond pre-GST incidence except may be in a few items that were enjoying certain duty concessions, said the official.

However, industry players believe a tax cut could help boost demand at a time the economy is struggling with a contraction triggered by the coronavirus crisis. There is a need to bring down total cost of acquisition of vehicles including road tax, not just GST, Maruti Suzuki chairman R C Bhargava said in an interview published in The Economic Times on Thursday.

The government keeps taxes on cars and motorbikes so high that companies find it hard to build scale, a Bloomberg report had said on Tuesday quoting Shekar Viswanathan, vice chairman of Toyota’s local unit, Toyota Kirloskar Motor.

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