ICRA: Corporate Tax Rate Rationalisation, A Positive For Automobile Industry

The recent cut in corporate tax rates by the government would help boost investment cycle, which will have a positive impact on overall economic activity. In particular, the automotive industry, which accounts for about half of India’s manufacturing GDP, is likely to be one of the key beneficiaries of the corporate tax revision.

Says Pavethra Ponniah, Vice President & Sector Head, ICRA, “Under the current weak demand conditions, OEMs are expected to pass on some the benefits of tax revision to the end consumers. This implies that the price correction in coming months will to an extent address the demand side issues. Moreover, clarity from the government, that there is no further GST/ Cess revision, will help consumers who were waiting for improved clarity prior to their car purchase decision.”

ICRA notes that the current reduction of tax rates to globally competitive levels will incentivize OEMs and their vendors to increase localization, which augurs well for the industry. India imported auto-components worth $17.6 billion during FY2020; this is likely to increase further in FY2021 given the transitionary phase towards stricter safety & emission norms that the industry is currently in the midst of.  Further, given the increasing US-China trade tensions, revision in corporate tax will attract FDI in the Indian manufacturing sector, as the revised tax structure is now in line with other emerging markets.

In the current fiscal, the Indian automotive industry, especially the passenger vehicle segment has witnessed one of the worst slides since the last two decade because of multiple factors. Tighter financing environment for consumers and liquidity crunch faced by dealerships coupled with weak farm income and the overall slowdown in economic activity has impacted consumer sentiments and purchasing behavior.