Home >Opinion >Views >Opinion | Toyota needs a revisit of its business model

A leading Japanese carmaker recently saidit has halted its plan to scale its operations owing to prevailing taxation policies in India. The company termed the policy as ‘we don’t want you’ tax policy. This came at a time when India is rolling out a red carpet for foreign companies as the government aims to attract global value chains.

To be fair, there have been instances when India’s tax administration has made blunders while dealing with foreign investors. A recent instance is the Vodafone retrospective taxation issue during the UPA-II. However, the present situation with Toyota is fundamentally different. For starters, to claim that India has a ‘we don’t want you’ taxation policy after India’s historic corporate tax cut is extremely unfair to the government. It is worthwhile to note that while the effective corporate tax rate in India is around 25%, the same in Japan is 30.62%. For new manufacturing companies, the corporate tax rate is even lower at 18% in India.

The more important point is that India has made several attempts at reforming the tax rate over the last few years and broadly, the tax rates have tended to reduce on most instances. Needless to say, that there is a genuine need for rationalization of personal income taxes – or direct taxes as a whole – and that while government has taken some measures in this direction, a more aggressive approach would be appreciated. Nonetheless, to criticize the attempt at a time when tax rationalization is ongoing seems to be driven by the high tax on hybrid vehicles – which is a policy decision as government recognizes them as different from electric vehicles. Thus, the statement is more due to personal vested interests rather than any legitimate concern for a broader tax reform and such statements often do more damage to the prospects of genuine reforms.

It is further curious to observe that while Toyota is reluctant to scale its operations, companies such as Maruti Suzuki and Hyundai continue to dominate the Indian market with the same taxation regime. Natural to ask, how is one taxation regime more conducive to Suzuki – another Japanese car manufacturer while Toyota finds it as a bottleneck for its growth? In fact, even as Toyota India finds the tax regime responsible for their lower than normal capacity utilization, several car brands such as Kia and Morris Garages have launched their vehicles and have swiftly captured a decent share of the domestic consumer market. In the event of a wonky taxation regime, new car makers would not have lined up to launch products in India. Nobody is denying that India does not have wonky taxation policies – they are there for several sectors, but not in this particular case.

The 28% tax rate may seem excessive, especially since it has a compensation cess which is further levied on top of it. But a frequently missed point about the Goods and Service Tax regime is the input tax credit at every stage of the value addition process. Therefore, the increase in tax incidence is not as high or significant to cause for a lower demand for automobiles. More importantly, India has had the bulk of these taxation policies for many decades whereby we taxed cars at a higher rate, so what has changed suddenly for Toyota? One is not justifying the high rates of tax on automobiles but is simply asking to not ascribe the consequences of bad business decisions to the taxation policies.

This is important as over the coming few years, we may witness a further increase in the tax rates of automobiles to reduce the carbon emissions – and our carbon footprint. This has become critical as the world wakes up to recognizing the perils of climate change, especially at a time when forest fires, frequent hurricanes, erratic rainfall, and other such events become a regular feature. Consequently, most countries will increase taxes on automobiles in an attempt to incentivize electric vehicles going forward.

The difference, in India’s approach as against many other countries is on dealing with Hybrid cars as India views them as a cleaner variant of the conventional diesel and petroleum-based cars. This approach is guided by the fact that while hybrid cars may have lower emissions, they cannot be considered as clean fuel-based automobile vehicles. Thus, they do not get the benefit that electric vehicles get in the form of a lower indirect tax rate. This is fair and consistent with the ethical position that India has taken to ensure inter and intra generational equity in the form of access to a clean environment.

Additionally, it is important to observe that Toyota is not the sole company that has met with limited success in capturing the domestic market as companies such as Ford and GM had a similar fate. This had more to do with high costs of cars, stiff domestic competition and lack of adequate service support rather than our domestic taxation policies. The recent statement thus appears to be an attempt at getting a tax cut for the automobile sector rather than from a genuine concern either for the industry or for the agenda of taxation reforms.

In fact, interestingly, when the Union Government had lowered excise to incentivize production and sale of automobiles, Toyota was reluctant to pass on the benefit to the consumers. This leaves us with the question of whether a tax cut would eventually benefit the consumers or would it go into their profit margins.

While there is a genuine need for a more comprehensive taxation reforms, using it as an opportunity to further special interest is neither fair to the government nor ethical on part of any private entity. The government has definitely made some progress on the tax reforms front and will likely continue doing so in the near future. In the meantime, automobile companies must borrow a book from the page of new entrants which have been able to dodge the domestic slowdown simply by offering a differentiated product at a competitive price. One hopes that more companies end up adapting this approach in the near future.

(The author is a Delhi-based policy researcher. Views are personal and do not reflect Mint’s editors'.)

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