A taxing time for the auto industry

A recent comment by a Toyota Kirloskar Motor (TKM) executive on India’s high taxation levies in the auto space has set the cat among the pigeons.

Finance Ministry officials have now stepped into the picture and insisted that the GST structure on cars and two-wheelers, at 28 percent, is actually reasonable compared to other countries. Hence, they believe that is actually important for automakers to focus on keeping their manufacturing costs in check and also reduce royalty payment to their parent companies.

Clearly, there is a serious tug-of-war happening between the industry and government, even while TKM has attempted to douse the fire by stating that it will continue to invest in India. The government’s insistence on GST levels being lower than a handful of countries like Japan and the UK may be fine (and debatable), but the signals being sent are all wrong, especially at a time like this.

After all, COVID-19 has virtually punctured the India growth story, with the GDP plummeting by nearly 24 percent in the April-June quarter. Furthermore, millions of jobs have been lost and there seems to be no respite from the daily tally of infections, which are now inching towards the one lakh mark.

In this background, it is perfectly legitimate for the automotive industry to reach out to the government for some relief. There have been some hints coming in from ministry officials that a lower GST level of 18 percent could be considered for two-wheelers and, perhaps, cars, but the latest salvo on the TKM saga has pretty much buried any such hopes.

More than just GST

In any case, the auto industry has every reason to feel shortchanged, since there are levies galore beyond GST, like registration tax, insurance cover and what have you. With auto fuels also getting pricier, the car buyer will have their work cut out on meeting the challenge of costs.

Captains of the two-wheeler industry have also said that the bigger problem facing the industry is overregulation in the form of clamping excessive diktats in the form of insurance, safety systems and more. Beyond this, all manufacturers have spent big money on transiting to Bharat Stage 6 emissions norms, and recouping these investments will be a tall order, especially when customers will be hard pressed to spend more.

The government could argue that it is already scraping the bottom of the barrel with revenues drying up. It is this reality combined with the sorry state of affairs across various states that has led to a slugfest with the Centre in recent times. Yet, the argument is not good enough to help out an industry which contributes to 50 percent of manufacturing GDP and is in dire need of a lifeline.

What needs to be done

Reducing the GST to 18 percent, even as a temporary measure, will go a long way in drawing customers back to showrooms. Most of them will, in fact, be itching to buy a two-wheeler or car in the context of COVID-19, and the paranoia of using public transport. When they are incentivised to do so, the volumes coming in may just offset any potential loss of revenue from a lower GST.

Employment will surge, factories will be buzzing with activity and India could once again claim its place in the sun as an important manufacturing hub for the auto sector. A failure to do so may just tilt the scales in favour of neighbouring countries like Bangladesh and Vietnam, which have already surged ahead of India in sectors like textiles. There is no reason why they will not look for an encore in the automotive space.