Centre may spurn demand for GST cut on automobiles

Industry asked to make cuts in royalty payments to parents abroad: Finmin sources

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 make 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.

“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.