Automakers should cut royalty payouts to foreign parents and boost efficiency to reduce vehicle prices instead of asking the government to lower taxes, a senior finance ministry official said, ruling out tax breaks for the companies to ride out the coronavirus crisis and the economic slowdown that has crimped demand.
Companies including Maruti Suzuki India Ltd, Toyota Kirloskar Motor Pvt. Ltd, Hero MotoCorp Ltd and Ashok Leyland Ltd have been demanding cuts in the Goods and Services Tax (GST) rate on automobiles, as well as incentives to scrap old vehicles, to help revive sales after the pandemic hit India. A 15 September Bloomberg report cited Shekar Viswanathan, vice-chairman of Toyota Kirloskar, as saying that the company won’t expand further in India because of high taxes.
The government official, who spoke on condition of anonymity, rejected suggestions made by the automakers that high taxes have dampened demand, arguing that India has a moderate corporate tax regime and allows companies to make royalty payments without restrictions.
Still, the payouts for using a parent company’s technology and branding have been a matter of tax disputes, and the government has, at times, considered re-imposing curbs to limit excessive payments.
“Royalty payments are typically linked to sales and can be made even if the local arm is loss-making unlike dividends paid from profits to the foreign parent. Royalty payments can, of course, impact the final sales price as it adds to the cost. Although businesses have compelling reasons to pay royalty for technical knowhow, brand, licences, etc., obtained from the parent, they can be viewed as means of shifting profits if they are not at arm’s length,” said Amit Maheshwari, partner, Ashok Maheshwary and Associates Llp.
Maruti Suzuki’s latest annual report showed that royalty expenses paid to parent Suzuki Motor Corp. for FY20 were ₹3,817 crore, falling from ₹4,490 crore in the previous fiscal.
“Companies should cut their costs of manufacturing by cutting down the royalty payments to their parent companies abroad instead of asking the government to reduce GST,” the official suggested. Royalty payments also get concessional tax rates, depending on the terms of India’s tax treaties with other countries.
Vehicle manufacturers have been witnessing a steady decline in sales from the second half of FY19 due to an economic slowdown and an increase in prices because of a shift to the stricter Bharat Stage-VI emission norms as well as new safety regulations. In the year ended 31 March, sales of vehicles fell in the range of 15% to 25% across categories after reporting low-single-digit growth in the previous year.
Automobiles now attract 28% GST and a cess ranging from 1% to 22%. GST has brought in transparency in taxation which highlights the total tax incidence on the final product, the official said, adding that the tax structure was complex in the earlier fragmented tax system.
Vehicle sales are expected to fall in the range of 25% to 45% across segments this fiscal, according to lobby group Society of Indian Automobile Manufacturers.
“Affordability factor is most important in India and has become even more now because income levels have come down. They will take some time to grow to the normal level and grow beyond that,” R.C. Bhargava, chairman, Maruti Suzuki, said in an interview on 9 August.