Surprised by the "sudden dissent" from automoblie companies on the state of taxation, union finance ministry sources believes that the tax policy for the sector has been fair and consistent for a long time and should not worry the industry.
The response comes in the wake of the recent criticism from Toyota India, which said high tax rates were hurting the sector, and essentially gave a message to the companies that "we don’t want you".
According to finance ministry sources, North Block is of a firm belief that there has been complete certainty as such in the auto sector taxation in India. As and when felt, certain concessions too were given to the electric vehicles and hybrid vehicles segment.
Rather the view at finance ministry, according finance ministry sources the most established players of the auto sector have been in India for quite some time and are used to the regulatory and taxation environment. The auto sector has grown and flourished in this regime, said a finance ministry source.
"It's evident from the huge payouts in the form of royalty made by these auto companies to their parent companies located abroad. The view that high taxation in India with regards to the auto sector is causing a demand slump and difficulty in scaling up for auto players is highly misplaced," finance ministry sources added.
"The facts are contrary to what has been reported in the media. GST rates on automobiles are less than what VAT and excise duty rates used to be in pre-GST times. India's tax policy on automobile has been quite consistent for the last three decades now in the form of allowing foreign investment and incentivizing the domestic manufacturing by providing reasonable protection from imports," finance ministry sources in the know told CNBC-TV18.
"Industry has on its part delivered. It has contributed by way of large investments and employment. All of a sudden, dissent in some quarter on tax rates on automobile is surprising. In fact these companies should cut down their costs of manufacturing by cutting down the royalty payments to their parent companies abroad instead of asking the Government to reduce GST," finance ministry sources added.
Arguing about the entire debate being wrongly placed, that have lead to pointing fingers at the tax department yet again, top government officials dealing with the matter said, "The GST on automobiles is in the highest GST bracket across the globe without much exception. In fact, world over, automobiles are subject to taxation on the higher side. For example, Japan currently has three types of taxes on automobiles – once on purchase, then an annual automobile tax (yes, an annual tax) based on engine size and finally a weight tax at inspections required once every two years. Over and above this, there is GST at the highest of the applicable rates."
"Also, in EU, the base rate for VAT/GST on automobiles ranges from 20 percent to 25 percent with plotters of other taxes varying with jurisdiction. UK charges vehicle excise duties which varies with car emission norms and has 14 rate slabs varying from £0 a year to £2175 a year with surcharge of £325 in the first year and £150 for expensive vehicles. Besides, there are road usage charges. Further, high parking charges are common across the globe. Most of the countries provide certain concessions to electric vehicles. Given this, it would be unfair to claim that the GST rates in India are astounding or a demand dampener," top government officials added.
Meanwhile, sources in the know of the tax matters on auto-sector added that with the introduction of GST, multitude of taxes in the form of excise duty, special excise duties, cesses, VAT, CST etc, gave way to uniform GST. Vehicles, based on their high pre-GST incidence were placed in 28 percent slab. Passenger vehicles also attract compensation cess ranging from 1 percent to 22 percent. However, with compensation cess, the taxes have not gone beyond pre-GST incidences except may be in few that were enjoying certain duty concessions.
Rather government sources feel that the sector is reeling under pressure due to slowdown, COVID-19 pandemic and stricter environmental norms, etc and not because of the tax policies, "Trends show that auto companies which makes expensive cars, naturally are unable to find buyers. But there are many companies which have launched small cars at affordable price ranges are able to sell their cars," sources in the know told CNBC-TV18.
"If the regulatory environment was not conducive, it would be hard to imagine new players investing heavily into manufacturing facilities like Jeep, Kia Motors and MG to name a few. Those companies which can feel the pulse of the Indian consumer and deliver accordingly are ruling the roost. At the end of the day, customer is the king," sources added.
It is understood that amidst the slump in production and demand in recent months, green shoots are visible in the auto sector. According to SIAM data, first time in many months now, the sale of passenger vehicles and two-wheelers has surged last month. As per figures for the month of August 2020, the domestic production of two-wheelers has outdone the numbers of August 2019.
While in August 2019, 18.58 lakh units were produced and in August 2020, the numbers have risen to 18.59 lakh units. This is up from a mere 3 lakh units in May 2020. Similarly, in the passenger vehicles segment, in August 2019, 1.89 lakh units were sold and in August 2020, around 2.16 lakh units have been sold (Source: SIAM).
"Clearly, after many gloomy months, the auto-sector catches up. This trend is likely to continue in coming months as per the industry sources”, claimed the source. The government sources feel that they have always been prompt to assess the health of the automobile sector as it gives them the immediate pulse of manufacturing sector in the country.
“It is one of those shining examples of Indian industriousness and CKDs in the initial days which were raised gradually and incentivize for capability of delivering quality products. Government policies have also been benefiting this segment. Higher protection from imports, lower import duties on parts and auto manufacturing has helped in building the whole eco-system for automobile manufacturing in India. Industry has responded remarkably well over the years. India is now amongst the leading manufacturer of autos and pioneering certain segments thereof. Exports of auto and auto parts have grown over the years,” sources said.
Source close to the development said claimed that government is conscious of the fact that the struggle of auto sectors in last few months, after a sustained growth post global recession, has few contributors, "The base effect, as industry grew rapidly post 2014, the NBFC crises, the shift in customer choices, millennial shying away from owning vehicles, the focus on stringent standards for checking pollution, mandatory BS-VI compliance since April this year, and transition to electric vehicles usage with policy tilting towards encouraging electric vehicles caused upheaval in the industry."
"However, India saw new players in Jeep, MG Motors, Kia and few other making inroads. Some of the incumbents felt pressure while others like Maruti and Hyundai continued their progress. Certain segments did not do well. One such case is that of hybrid vehicles with large variants from mild to strong hybrids. As quick transition was happening towards electric vehicle, there were few takers in India for hybrid vehicles. Their cost also contributed to consumer not making a choice for hybrid," said people familiar with the matter.