On Friday, Finance Minister Nirmala Sitharaman announced that new firms manufacturing parts and components for Electric Vehicles were likely to benefit from the reduced corporate taxes. The new proposal stated that the manufacturing units established after 1st October 2019 would have to pay reduced corporate tax at 17.16% from 21.55%.
The government expects that these steps would drive domestic production for charging equipment, lithium-ion batteries, electronic and electrical parts. The producers of hybrid vehicles and even conventional internal combustion vehicles would benefit. However, components like airbags, inflators, and sensors might continue to be imported.
Localized manufacturing
Manufacturers have started to increase the localization of products in the country, and the new tax slabs would help usher in more modern companies. The government hopes that this would boost the auto industry and its supporting supply chain, both of which account for 49% of India’s manufacturing GDP.
The new manufacturing companies, according to the latest proposal, would be paying income tax at 15%. The benefit would be available to the companies who won’t avail any other incentives and commence production on or before 31st March 2023. The Effective Rate of Tax for such companies would be 17.01% inclusive of cess and surcharge without the requirement to pay any additional MAT.
Making EVs affordable
It would help boost Modi’s Make In India with EV-related new manufacturing companies rushing to the EV sector. Increased local EV production would help to grow the EV sales and make them more affordable. It would also cut costly crude oil imports and crop high levels of pollution in most of the major cities.
Managing director & CEO of Maruti Suzuki India Ltd, Kenichi Ayukawa, said that the Maruti Suzuki cars have around 90% localized content, given that some principal electronic parts are still imported. The company wants to promote make in India. He added that if anybody could make the critical electronic components in India with reliability and quality, it would help the entire Indian automobile industry.
Income tax rebates on EV
The steps taken by the Finance Ministry would complement the decisions announced in the Budget 2019 in July. The FM Sithraman has offered income tax rebates of up to Rs 1.5 lakh to customers on interest paid loans to electric automobiles, with a total exemption of Rs 2.5 lakh over the entire loan period. Sitharaman also announced waiver on customs duties on lithium-ion cells which would, in turn, help lower the cost of lithium-ion batteries in the country as they are not manufactured locally.
Reviving demand
On a possible push by automakers to recover overall low market in India, Chirag Jain, an analyst at SBICAP Securities, suggested that the government’s initiatives would boost earnings by 3-8%, as currently most of the auto firms pay taxes in the range of 28-34%.
He added that in the current low demand environment, mutually with high channel inventory ahead of Bharat Stage VI transition, the original equipment manufacturers would likely pass on these benefits to revive demand via higher discounts to consumers, which otherwise would’ve come largely at the cost of the margins.
