What corporate tax cuts mean for auto sector

The auto sector, which has been in the throes of a slowdown for a year, is expected to see an uptick in demand during the festive season, but an immediate revival after corporate tax cuts announced by the finance minister last week, is unlikely.

India Inc. is in high spirits over the tax cuts, and industry leaders believe it will give impetus to the manufacturing sector, and nudge companies to invest more. However, experts say it will take more than tax cuts to revive demand in the auto sector.

“This time it [the slowdown] is different, the current auto sector slowdown is considerably different from previous ones; it is driven by slowing incomes, savings, and financing,” Aditya Narain, head of research, Edelweiss Securities. “What reinforces its severity is the fact that never in the past have sales of all vehicle classes declined simultaneously for two consecutive quarters.”

Automakers have declared huge discounts to boost demand. Maruti Suzuki India is offering discounts up to ₹1 lakh this month while Tata Motors has benefits up to ₹1.50 lakh on offer through its Festival of Cars programme. Hyundai India is also offering discounts up to ₹2 lakh on Tucson and Elantra, and up to ₹95,000 on Grand i10. Meanwhile, Honda is offering its cars at a discount starting from ₹45,000 to up to ₹4 lakh.

Whether the benefits from the tax cut will be passed on to the consumer is yet to be seen. “The ball is in the manufacturers’ court now. The question is how much they are willing to do. Discounts are already at their peak and any further discounts will be beneficial for the consumer,” Gaurav Vangaal, country lead, light vehicle production forecasting, IHS Markit said.

Maruti Suzuki India’s chairman R.C. Bhargava has said the company was “looking into” the matter and an announcement is expected in a few days. Maruti Suzuki also expects higher sales in September compared to August. “The booking levels have gone up compared to last month… the expectation is that the 29th and 30th of this month will probably witness very high retail sales," Bhargava told Reuters on Monday.

Hyundai, Honda, and Toyota, however, believe that the existing incentives are good enough, and are not keen on offering further discounts and benefits during the October-November festive season.

Edelweiss Securities says automakers are likely to retain the benefit from the tax cut in the absence of a cut in the goods and services tax. “We expect OEMs (original equipment manufacturers) to retain benefits of the tax cut because passing on of benefits will lead to mere 1.0-1.5% price reduction (if entire chain passes on) or up to 0.50 bps in case only OEMs decide to pass on the benefits. We factor in the weaker-than-expected demand, recent fall in commodity prices and tax cuts,” Edelweiss Securities said.