Corporate tax cuts to have little impact on auto sales: Report

Massive reduction in corporate tax rates will have minimal impact to revive the steeply falling auto demand as the 10-12 percentage points reduction in the levy on companies can at best lead to a 1-2 percent discounts only, says a report. As against this, had the government offered a GST reduction, demand could have been propped up well, helping automakers offer a 7-8 percent discounts, the report adds.

The auto industry, which is facing its worst crisis in two decades, had been pleading for a GST cut to 18 percent from 28 percent now to boost sagging sales. But, GST Council refused to heed as the Central government chose to open the wallet for the entire India Inc by way of a corporate tax cut, first time in last 45 years following the deepening slowdown, which was reflected in the first quarter GDP slipping to a six-year low of 5 percent. According to reports, almost 55 percent of the Rs 1.45 lakh crore tax giveaways will be borne by the states, putting their finances into a deep-freeze. Ahead of the GST Council meeting Friday evening, finance minister Nirmala Sitharaman had announced the tax cuts in Goa last Friday.

"Original equipment makers (OEMs) could choose to pass corporate tax cut benefit to customers, but this would imply only a 1-2 percent additional discount as against 7-8 percent if they were offered a 10 percent GST cut (which did not happen)," foreign brokerage Jefferies said in report Monday. Noting that a 10 percentage point reduction in GST would have brought down on-road prices by as much as 7-8 percent, the report said, "as a result, the issue of inventory pile up ahead of the BS-VI transition in April persists, particularly for two-wheelers and medium and heavy vehicles." Barring a sharp surge in demand during the forthcoming festive season--our channel checks suggest relatively weak demand in the first phase of the festive season in Maharashtra and Kerala, among others. As a result OEMs will have to discount aggressively to bring inventory under control, with implications for the second half earnings, the report notes.

Already auto companies are offering heavy discounts to tide over the crisis. If fact M&M's Pawan Goenka was on record admitting that he was already offering 20 percent discounts to boost sales, which had plunged close to 32 percent for the industry in Q1-- the worst in two decades. Nevertheless, acceding to the report, bringing down the marginal tax rate cut from 34.9 percent to 25.2 percent should mean a 5-13 percent boost in earnings per share for the OEMs. In other words, OEMs may see a 5-13 percent boost in bottomline from the tax cut.

This benefit should start showing from Q2, with possibly even the write-back on higher taxes provided in Q1 and deferred tax liability reflected in Q2 numbers, it added. "We do not expect a significant turnaround in demand immediately and BS-IV inventory correction remains a headwind for 2HFY20. However, the measures have improved the prospects for a quicker and stronger recovery next fiscal," the report concludes..