Carmakers can cut prices by a mere 0.5% after 8% corporate tax cut, says RC Bhargava

Automakers may, at best, be able to reduce vehicle prices by only half a per cent if they decide to pass on the benefit of corporate tax cut to customers, R C Bhargava, Chairman of Maruti Suzuki, India's largest automaker, said on Tuesday.

"This year, since now it's only half the year left, there is scope for some (price) reduction by companies. But in a full year, the tax cut can be about half a per cent of sales value. That's the best you can do and it does not take you far," he told Business Today.

This implies that the price of the base model of Maruti Swift, one of the company's best selling cars, can go down by only Rs 2570 given the tag of Rs 5.14 lakh for the petrol version.

This will not result in any savings for customers and is not enough to spur demand. The auto sector is reeling under the worst-ever slowdown. The sales of passenger vehicles fell for the tenth straight month in August by 32 per cent over the year-ago month.

Finance Minister Nirmala Sitharaman on Friday announced to reduce the basic corporate tax rate to 22 per cent from 30 per cent while for new manufacturing companies it has been cut down to 15 per cent from 25 per cent. The effective corporate tax rate for companies will be 25.2 per cent including all additional levies, a benefit of nearly 5 per cent.

Assuming a company is making 10 per cent profit on sales, the tax cut will reduce tax outgo from 10 per cent to 8 per cent, giving an advantage of 2 per cent. Back-of-the-envelope calculations show that it works out to half a per cent of the sale price as 1 per cent profit is 10 per cent of sales price. "And we are getting only half of that here, which is half a per cent," Bhargava explained.

"If you just want to use this savings in tax for reducing the price, you can do only half a per cent. But in the longer term, the bigger advantage is that it creates resources for making more investments for improving technology, quality and R&D," he added.

Most analysts, however, believe that the companies will pass on the benefit of rate cuts to customers. Jitendra Gohil, CFA, Head India Equity Research, Credit Suisse Wealth Management, India, said in a report that certain industries where utilisation is low and demand feeble (for example, autos and cement) are likely to pass this tax benefit on to consumer to spur demand.

However, even if automakers decide to pass on the benefit from tax cuts to customers, it may be on a select few models. "There is also the question whether you need to give this (discount) on all the products or some of the products. It will depend on where sales have to be maximised and where you are finding the most difficulty in selling the products," he added.

While companies have not decided on passing on the benefit to customers in the near-term, the stock market sentiment has improved post the Friday's announcement. BSE Sensex went up by 3000 points in the two sessions on Friday and Monday. "The moment market goes up, people make a lot of money and that is used for buying cars. The booming market makes you more optimistic and helps in sales of big-ticket items, including cars," Bhargava added.

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