Slashing of corporate tax rates brings cheer to Indian automakers

by Nilesh Wadhwa and Shahkar Abidi 20 Sep 2019

Finance Minister Nirmala Sitharaman’s announcement of slashing corporate tax rates for domestic companies and new domestic manufacturing companies has boosted sentiment across industry.

India Auto Inc’s as well as all of corporate India’s attention was on today’s key GST Council meeting held in Goa. While the much-awaited GST cut from the existing 28 percent for automobiles did not happen, what did brighten up the mood for captains of industry was Finance Minister Nirmala Sitharaman’s announcement of slashing corporate tax rates for domestic companies and new domestic manufacturing companies. This, along with other amendments, is likely to spur demand for contract manufacturing in the automotive industry and increase India’s competitiveness versus South Asian countries, claim industry experts.

According to industry captains and insiders, slashing of corporate taxes along with the recent announcement of 100 percent Foreign Direct Investment (FDI) may provide additional incentives for the companies to get into contract manufacturing rather than setting up manufacturing plant themselves. Also, the lower income tax rate of 15 percent, which is on par with some other South Asian countries, for any new domestic incorporated company from October will attract new ventures into the automobile sector, especially in the electric vehicle (EV) segment, the experts added.

Rajan Wadhera, President, SIAM welcomed the announcements made by the Finance Minister, including the reduction of corporate tax rate to 22 percent and No Minimum Alternate Tax for companies not availing incentives under Income Tax Act.

Additionally, the reduction of corporate tax to 15 percent for new companies making fresh investments from October 1, 2019, will support investment and also FDI in the auto sector. This is expected to give a big boost to Make in India for automobile industry. Expansion of scope of CSR (Corporate Social Responsibility) expenditure to include incubation centres and R&D activities will also help with R&D expenditures in automobile sector. All these set of fiscal measures are expected to uplift market sentiments and improve demand for automobiles.

Wadhera emphasised that 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 business environment to give a definite boost to economic growth.

ACMA, the apex body representing India’s auto component manufacturing sector, welcomed the measures. The auto component industry which contributes 2.3 percent to India’s GDP, is expected to see these measures give a big impetus to domestic manufacturing and help attract investments in the sector. The announcement made on the onset of the festive season is expected to infuse positive sentiments in the market.

Deepak Jain, President, ACMA said, “The announcement made by Finance Minister is indeed heartening and reassuring. Reduction in Corporate tax to 22 percent for existing companies, 15 percent for new manufacturing companies and relief on account of MAT are steps in the right direction to give manufacturing, investments and economic activity a boost. The measures will also put India in the league of competitive economies in the world. Expansion of scope of CSR expenditure to include incubation centres and public funded institutions will also encourage R&D in automotive industry”.

“We do hope that the Central Government in consultation with the states will consider ensuring a uniform GST rate of 18 percent on all auto components. Currently 60 percent of auto components are at 18 percent, while the rest are at 28 percent. A lower rate of GST will not only ensure better compliance but also help curb grey operations in the aftermarket”, added Jain.

Shekar Viswanathan, vice-chairman and whole-time Director, Toyota Kirloskar Motor: "As announced by the Finance Minister, we are pleased to note that the corporate tax rate for large domestic companies has been slashed from 30 percent to 22 percent without incentive or exemption and that of new local manufacturing companies in India has been further lowered to 15 percent without incentive or exemption. We also welcome that Minimum Alternative Tax (MAT), which now will not be applicable when adopting corporate tax under this new provision. This is a welcome structural change and comes as a great respite to corporates. This positive move from the government of India will lead to further investments in the country as well as create more business opportunities. The ‘Make in India’ initiative will thus get a further impetus."

"As far as automotive sector is concerned, we believe that on a mid to long term basis, the government should consider the merits of moving towards a carbon (fuel efficiency)-based GST taxation policy which will not only lead to huge fossil fuel savings but will also help in lowering emissions," added Viswanathan.

Martin Schwenk, MD and CEO, Mercedes-Benz India: "Reduction in corporate tax to 22 percent is a shot in the arm as it is directly correlated to economic growth. Reduction of corporate tax has been on the agenda and it will also boost ‘Make in India' initiatives. It will promote investment, help sustain profitability during challenging times and should also improve buying sentiments, thus helping the auto sector in long term.”

Ajay Durrani, MD, Covestro India: “The recent change in corporate tax in India is a very positive and bold step taken by the government. Reduction in corporate tax to 25 percent will spur the economic growth of the country in a big way and will also provide relief to domestic and manufacturing companies to a larger extent.  With this positive step, the Indian tax level is now at par with the global tax level and will open doors for Indian companies to compete internationally.”

Commenting on the development, Sridhar V, Partner, Grant Thornton India said that the announcement will definitely help the automobile manufacturing industry.