No easing GST rate, automakers should cut royalty payments: FinMin sources

They say companies should cut royalty payments to parents abroad instead of asking GST cut to tide over Covid crisis

There may not be any cut in goods and services tax (GST) rates for automobiles, finance ministry sources indicated, despite demand for this by the pandemic-hit sector.

Rather, the industry has been asked to reduce cuts in royalty payments to parents abroad.

Indian auto companies like Maruti Suzuki, Toyota Kirloskar, and Hyundai, and auto component makers pay royalty to their parents for obtaining technical assistance/technical know-how.

Sources said the rates under the new indirect tax system for the sector were lower than under the old tax regime of excise duty and value-added tax (VAT).

“The facts are contrary to what has been reported in the media. GST rates on automobiles are lower than what VAT and excise duty rates used to be in pre-GST times,” a source said.

The sources said all of a sudden, dissent in some quarters on tax rates on automobiles was surprising.

“These companies should cut royalty payments to their parents abroad,” another source said.

Sources said most established players in the auto industry were here for long and used to the regulatory and taxation environment in India, and flourished.

However, executives of auto firms countered the view, saying tax and outgo for royalty payment could not be equivalent.

They said the industry was demanding a tax cut now because demand was subdued and reduction in tax could spur demand.

“Royalty payment is a global phenomenon and it has helped Indian companies to obtain technological know-how. Companies have been reducing royalty payments. The industry is demanding reduction in tax so that consumer demand recovers,” an executive of an auto company said.

“Does it make sense to build the same technology in India and double the cost,” he asked.

Maruti Suzuki in 2018 revised the method of calculating royalty, which results in lower payment for new model agreements.

Royalty payment was delinked from fluctuations in the currency market. Also, after the sales of a model reach a threshold — to be set by the parent — the royalty to be paid by Maruti Suzuki will come down, boosting the company’s Ebitda (earnings before interest, taxes, depreciation, and amortisation), or the operating margin.

Suzuki reimburses the money Maruti Suzuki spends on research and development in India, which strengthens the books of its subsidiary.

Vehicles, based on their high pre-GST incidence, were placed in 28 per cent slab. Passenger vehicles attract a compensation cess of 1-22 per cent.

However, with the compensation cess, the taxes have not gone beyond pre-GST levels, except maybe for a few that were enjoying duty concessions, they added. 

Sources deny that India imposes higher taxes on automobiles than other countries do.

GST on automobiles is in the highest bracket across the globe without much exception, they say.

They cited the example of Japan, which has three types of tax on automobiles – one on purchase, then an annual automobile tax based on engine size, and finally a weight tax at inspection required once every two years. Over and above this, there is GST at the highest of the applicable rates.

Also, in the European Union, the base rate for VAT/GST on automobiles ranges from 20 per cent to 25 per cent, with other taxes varying with jurisdiction.

Sources said amid slowdown, the pandemic and stricter environmental norms, a milieu of pessimism created around the auto sector in various media reports often flogged the government and its policies (especially taxation) for being against the interests of the industry, but “it was incorrectly made out in the media that the high taxes on automobiles are driving down demand in the country”.

“If the regulatory environment is not conducive, it would be hard to imagine new players investing heavily in manufacturing facilities -- Jeep, Kia Motors, and MG, to name a few,” said a source cited above.

Another source said amid the slump in production and demand in recent months, green shoots were visible in the auto sector.

He referred to sales of passenger vehicles and two-wheelers surging last month.

According to these figures for the month of August 2020, the domestic production of two wheelers has outdone the numbers of August 2019. While in August 2019, 1.88 lakh units were produced; 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, while in August 2019, 1.89 lakh units were sold, in August 2020 around 2.16 lakh units were 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.

It may further be noted that the struggle of auto sector in the 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, the sources said.

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 a quick transition was happening towards electric vehicles, there were few takers in India for hybrid vehicles. Their cost also contributed to consumers not making a choice for hybrid, the sources said.