Corporation tax cut: Toyota plans to bring key global suppliers to India

Toyota Kirloskar Motor will consider getting some of the key suppliers in its global sourcing network to set up manufacturing units in India as the company seeks to avail of benefits of a lower corporation tax that new manufacturing units are now eligible for, a top company executive said.

After the latest tax cut by the government, new manufacturing units will pay tax at 17.16 per cent. Part of the tax saving could be passed on to customers like Toyota.

The import substitution will also help the Indian arm of the Japanese car maker to source parts locally and thereby cut its import bill, Shekar Viswanathan, vice-chairman and whole-time director at Toyota Kirloskar, told Business Standard. The company is also looking to set up a separate, exclusive legal entity for manufacturing electric and hybrid cars, he said.  

“There are ways in which one can make use of the opportunities that come along. The tax benefits would come with new product plans and expansion. Let’s say if there is a particular part currently being imported, we can get the supplier to set up a base here within our own premises,” said Viswanathan.

He, however, clarified any such decision would be taken after weighing the pros and cons, because lower tax was just incidental to the entire business plan. “Localisation is a process and not an event. It has to be done carefully without any compromise on quality,” he added.

According to the announcement made by Finance Minister Nirmala Sitharaman on Friday, new domestic companies — incorporated on or after October 1, 2019, and commencing manufacturing on or before March 31, 2023 — making fresh investments in manufacturing will have an option to avail of a lower tax rate of 15 per cent plus 10 per cent surcharge and 4 per cent cess, taking the effective tax rate to 17.16 per cent.

Also, companies exercising this option will not be required to pay the minimum alternate tax (MAT).

Rajeev Pratap Singh, auto sector head at Deloitte, foresees part makers for BSVI engines flocking to India, saying such companies “will now find India an attractive destination”. Some of the high-value parts for BSVI engines are currently imported. He, however, added it would not “happen overnight” because companies would wait for consistency in policy. “They will be a little cautious while taking such decisions. They won’t like if the government takes two steps forward and one backward,” he said. More than the vehicle makers, Singh expects foreign direct investment in the auto component sector to go up as multinationals accelerate their localisation efforts.

Manufacturing boost

• Toyota may set up a separate entity for electric, hybrid vehicles  

• New manufacturing units will now pay a lower corporation tax of 17%

• Experts believe global component makers may find India an attractive base

• Share of locally procured parts in Toyota’s models ranges from 60 to 85%

Toyota, said Viswanathan, had an ongoing programme of cost reduction, which it had been executing by sourcing parts from local suppliers or by arranging its overseas supplier partners to come in and invest in India. 

The recent announcement will encourage its overseas partners to come and set up shop in India. “This will also provide a much-needed fillip to the ‘Make in India’ initiative,” he said.

The share of locally procured parts in Toyota’s models ranges from 60 to 85 per cent. The rate cut in the corporation tax will inspire further investments and aid localisation efforts. Both the benefits will finally add to the country’s competitiveness, said Viswanathan.

The tax cut for new companies makes India as competitive as countries in the ASEAN (Association of South East Asian Nations) region such as Thailand, Indonesia and Vietnam. This is expected to help Toyota Kirloskar and its suppliers being able to export parts and aggregates from India to Toyota’s global network.

The lower tax is subject to certain preconditions with provisions on anti-avoidance included. The tax authority has the powers to apply the lower tax rate to a reasonable level of profits, if it appears to them that transactions with closely connected persons produces more than ordinary profits which might be expected to arise. For this purpose, the company shall also be liable to domestic transfer pricing provisions.