The rating agency ICRA in its latest report has said the automotive industry, which accounts for almost half the manufacturing GDP of India, is likely to be one of the key beneficiaries of recent corporate tax revision. It noted that the reduction of corporate tax rates to globally competitive levels will incentivise original equipment manufacturers (OEMs) and their vendors to increase localisation, which augurs well for the industry. Given the escalating trade war between the U.S. and China, it said revision in corporate tax will attract foreign direct investment (FDI) in Indian manufacturing sector, as the revised tax structure is now in line with other emerging markets.
According to the report, India has imported auto components worth $17.6 billion during 2019-20 (till now) and this is likely to increase further in 2020-21 given the transitionary phase towards stricter safety and emission norms. In the current fiscal, it said the Indian automotive industry, especially passenger vehicle segment, has witnessed one of the worst slides in the last two decades due to multiple factors like tighter financing environment for consumers and liquidity crunch faced by dealerships. Besides, it noted that weak farm income and overall slowdown in economic activity has impacted consumer sentiments and purchasing behavior.
ICRA further stated that under the current weak demand conditions, OEMs are expected to pass on some benefits of tax revision to the end consumers. It said this implies that the price correction in coming months will to an extent address the demand side issues. Moreover, it said clarity from the government that there is no further GST/cess revision will help consumers who were waiting for improved clarity prior to their car purchase decision.