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Gear Change: Lower cost due to tax sops to fuel auto demand

By Rohit Vaid

New Delhi/Mumbai, Sep 30 (udaipur kiran) Lower automobile costs resulting from the recent tax sops announced to prop-up growth and reverse the economic slowdown, along with the upcoming festive season offers, have the potential to accelerate the sector’s sales, industry insiders said.

Market observers contended that reducing effective corporate tax rate to 25.17 per cent (inclusive of all cess and surcharges) from 30 per cent for all domestic companies will allow more auto firms to reduce prices.

At present, Maruti Suzuki has announced an immediate Rs 5,000 cut in the prices of its bestselling cars.

Besides, other companies such as Bajaj Auto, Piaggio India and Isuzu Motors India too have announced festive season discounts.

“Lower prices can increase demand incrementally, but cannot be expected to boost demand significantly,” Sridhar V., Partner at Grant Thornton India LLP, told udaipur kiran.

“Increase in liquidity will also help in increasing borrowings and thereby impacting buyers’ interest positively,” he added.

According to Fitch Ratings Associate Director Snehdeep Bohra: “Lower tax can help auto OEMs cut prices.

“But the overall scope for price reduction (as percentage of existing price) may not be very big in itself to spur demand… Improvement in sentiment and passing on of lower interest rates will be key.”

Not just reduced prices but even an expected up-tick in investment, courtesy the savings afforded by the tax sops, will aid the commercial vehicle segment.

“The effective corporate tax reduction is indeed a big supply side reform and should help spur investment cycle, which has been perpetually crippled,” Madhavi Arora, economist with Edelweiss Securities, told udaipur kiran.

“However, the supply side tax reforms generally have relatively long term economic returns, albeit impacting the revenue side in the near term,” Arora said.

At present, the automobile industry is suffering from a slowdown caused by several factors such as high GST rates, farm distress, stagnant wages and liquidity constraints.

The industry’s sales and production levels have dramatically plunged, leading to job losses. In August, all major Original Equipment Manufacturers (OEMs) comprising passenger, commercial, two and three-wheeler manufacturers have reported massive decline in domestic sales.

As per the Society of Indian Automobile Manufacturers’ (SIAM) August sales figures, the overall sectoral offtake in the domestic market has plunged 23.55 per cent to 1,821,490 units, from 2,382,436 units sold during the corresponding month of the previous year.

Moreover, the industry has estimated that around 15,000 contractual manufacturing jobs have been lost and another million are at risk if the slowdown is not reversed.

(Rohit Vaid can be contacted at [email protected])

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