Days after Finance Minister Nirmala Sitharaman slashed the corporate tax rate, major automakers are expected to pass the gains to customers in the form of price cut to boost demand in the upcoming festive season.
While Maruti Suzuki India Ltd (MSIL), India’s largest carmaker has already announced to cut prices of select models by Rs 5,000 and others are expected to follow the suit.
According to experts, the price cuts might bring some cheers to the crisis-hit auto sector, however, experts are of the view that original equipment manufacturers should do some more to push sales. MSIL said it is optimistic that the price reduction will bring down the cost of acquisition, especially for the entry-level customers.
“This announcement around the festive season will help boost customer sentiments and revive the market to create demand,” the company said.
Maruti Suzuki chairman RC Bhargava said the booking levels have gone up compared to last month. The expectation is high that 29th and 30th of this month will probably witness very high retail sales.
Besides MSIL, other OEMs such as Piaggio India, Isuzu Motors and Honda Cars India have announced festive season discounts. It is expected that more OEMs may pass benefits to increase affordability of cars, which have been substantially gone up in last one year.
According to analysts, manufacturers need to give higher discounts to bring the inventory under control. “OEMs will have to discount aggressively and reduce dispatches to bring inventory under control, with implications for H2FY20 earnings. OEMs could choose to pass the corporate tax cut benefit to customers, but this would imply only a one-two per cent additional discount,” analysts at Jefferies noted.
Rating agency ICRA said the automotive industry, which accounts for about half of the country’s manufacturing GDP, is likely to be one of the key beneficiaries of corporate tax revision.
“Under the current weak demand conditions, OEMs are expected to pass on some benefits of tax revision to end consumers. This implies that the price correction in coming months will to an extent address the demand side issues,” ICRA VP and sector head Pavethra Ponniah said.
The Centre had reduced corporate tax rates from 30 to 22 per cent to improve consumer sentiments and increase spending by private firms. The effective tax to be paid by firms, including surcharge and cess, will be 25.17 per cent. However, analysts feel many OEMs might retain the tax cut benefits as it would not make a very vital impact.
“We expect OEMs to retain benefits of tax cut as passing on of benefits will lead to mere 1.0-1.5 per cent price reduction (if entire chain passes on) or up to 0.50 bps in case only OEMs decide to pass on benefits...factor in the weaker-than-expected demand, recent fall in commodity prices, tax cuts,” said Edelweiss Securities.