Finance Minister (FM) Nirmala Sitharaman on Friday slashed corporate tax rates. Pawan Goenka, managing director of Mahindra and Mahindra (M&M), shared his views on the announcement.
“What has been done is very significant. It is something that corporate India has been waiting for almost 4-5 years to bring the taxes down to 25 percent. It ticks a lot of boxes. Makes Indian business competitive globally because we are competing with companies that were paying 20-25 percent taxes in their home markets. We have had profitless growth for many companies for several years now. This tax reduction certainly changes that,” Goenka said on Monday.
Talking about the expectations of a price cut by auto companies, Goenka said, “One thing - somehow a wrong expectation has been coming out in the last two-three days that because of this auto companies would be able to or willing to reduce prices significantly. The call that the government of India (GoI) has taken is rather than doing some short-term stimulus, they are going to put money in the hands of the corporate for medium-term and long-term growth and this will get the capex cycle going. It will get a higher capacity, higher employment going rather than an immediate demand stimulus. If you do the math, even if we were to transfer all of the tax benefit that we will get, 100 percent of it in vehicle pricing, we will be able to reduce vehicle price by about 0.5 percent, which means on a Rs 8 lakh car by about Rs 3,000. That is not going to be a demand stimulus and most auto companies including M&M have already given a fairly significant increase in incentive for the festive season, from 3-7 percent – most companies are pretty much in that range, which is a couple of percentage points higher than what it was before the festive season. So I don’t think there is any room for any further passing on of the tax benefit."
“If some companies take a view because of desperation for getting volumes, that is a different matter. However, just calculations do not give us enough money in the hand to give any significant increase in incentives that we have already given,” said Goenka.
On the corporate tax cut announcement, Goenka said, “The announcement that was done on Friday is a very big sentiment booster. One of the three reasons for demand to be down is the very poor sentiment in the economy right now. I think this does more than its fair share of boosting the sentiment. I am sitting here today, expecting to see a good festive season. For a few days, there was a lull because goods and services tax (GST) cut expectation that the customers had and now that it is out of the way, we will start seeing retail happening."
When asked about how retails are behaving in September, he replied, “Right now the reports are coming positive and there are a lot of inquiries happening. A lot of momentum is coming back in the field.”
“Let me not underplay the benefit that we are going to get from this reduction. This is a huge step. The capex cycle will definitely start because of this,” he said.