Blaming high tax regime, Japanese auto-maker Toyota Motor Corp has decided not to expand its operations in India. While its Indian unit, Toyota Kirloskar Motor Pvt Ltd, will remain in business, it will not scale up operations, a senior executive of the company told Bloomberg.
Quoting Shekar Viswanathan, vice chairman of Toyota Kirloskar Motor, the report from BloombergQuint.com
says, "The (Indian) government keeps taxes on cars and motorbikes so high that companies find it hard to build scale. The high levies also put owning a car out of reach of many consumers, meaning factories are idled and jobs are not created."
“The message we are getting, after we have come here and invested money, is that we don’t want you,” Mr Viswanathan said in an interview, adding, "In the absence of any reforms, we won’t exit India, but we won’t scale up.”
Toyota Kirloskar Motor is the fourth largest car-maker in India after Maruti Suzuki India Ltd, Hyundai Motor India Ltd and Mahindra & Mahindra Ltd (M&M). Toyota Kirloskar Motor is a joint venture between Toyota Motor Corp and the Kirloskar group. Toyota holds 89% stake in the joint venture, while the balance 11% is owned by Kirloskar group.
In India, goods and service tax (GST) is levied at 28% on car and bikes.
In addition, there is a cess ranging from 1% to 15% levied by the government, depending on the class of the vehicle.
As is the practice in the automobile market, manufacturers and dealers offer lot of free goods or services or warranty to attract buyers in a very competitive business. Prior to GST, all such free goods or services were not taxed. But all these are now eligible for taxation under the GST. Since customers are reluctant to pay tax on free goods or services, it is the auto-maker or dealer who has to bear the burden of this additional tax.
“You would think the auto sector is making drugs or liquor,” Mr Vishwanathan from Toyota Kirloskar told Bloomberg, adding "Such punitive taxes discourage foreign investment, erode automakers’ margins and make the cost of launching new products 'prohibitive'."
According to data released by the Society of Indian Automobile Manufacturers (SIAM), during August 2020, a total of 215,916 passenger vehicles were sold in the domestic market, representing a rise of 14.16% from 189,129 units offtake during the like period of 2019.
However, according to Federation of Automobile Dealers Associations (FADA), vehicle registration during August continues to remain down by 27%, with the Indian economy continuing to battle with coronavirus (COVID-19) pandemic.
FADA says while original equipment manufacturers (OEMs) are dispatching vehicles to dealers with a purpose of stocking-up inventory for the upcoming festival season, retail sales are still at 70%-75% levels, despite the low base of last year. FADA says it advises extreme caution to all OEMs and its dealer fraternity to avoid excessive inventory build-up, thus leading to unmanageable interest cost which could further result in dealership closures.
FADA says it had once again requested the government to announce demand boosting stimulus and awaits the announcement of reduction in GST, especially for two-wheelers.
Toyota Kirloskar Motor is, however, facing more taxes as it is largely pivoted towards hybrid vehicles. Since these are not pure electric vehicles (that attract 5% tax) the auto-maker ends up paying as much as 43% tax on its hybrid vehicles.
The Indian government is doling out all benefits like lower tax for electric vehicles (EVs), without even looking into infrastructure (read charging stations) for these vehicles. In the Union Budget for 2019-20, the government announced to provide additional income-tax (I-T) deduction of Rs1.5 lakh on the interest paid on the loans taken to purchase EVs.
No such benefits are available for other vehicles that run on petrol, diesel or are hybrid vehicles. These vehicles are not only affordable but can be refuelled and serviced in any corner of the country. The same cannot be said for EVs. So, while auto-makers have the capability and are producing vehicles other than EVs, they are burdened with higher taxes.
In September 2014, prime minister Narendra Modi had launched his much ambitious 'Make in India' initiative to encourage companies to manufacture in the country and incentivise dedicated investments into manufacturing.
According to a September 2018 McKinsey report on 'The auto component industry in India: Preparing for the future', clubbed with growing income levels, it was expected that India’s consumer class will expand, leading to higher spending on more and better vehicles across segments – providing automotive companies with a ready-made market.
The Automotive Mission Plan (AMP) 2026 sees automotive industry in India to grow 3.5 – 4 times to $260 billion to $300 billion from the current value of $74 billion, generate 65 million jobs and contribute over 12% to India's gross domestic product (GDP).
While this picture looks rosy, auto-makers are, however, struggling with higher taxes.
Vehicles are no more luxury in India, which has a dearth of good, reliable public transport network with few exceptions. However, for the taxmen, buying and owning a vehicle is a luxury and so a 28% GST as well as cess is levied. We are not even talking about running cost of vehicle, especially the fuel cost, which is reaching new limits, despite lower crude oil prices as the Union and state governments are not ready to lower taxes. In fact, they have increased taxes on fuel to make good lower collection of revenues from all other sources. This makes buying and maintaining a vehicle more costly, as can be seen lower sales or registration volumes in the automobile market.