Auto cos chart ways to use corporate tax savings; capex, marketing get the boost

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More than a month after Finance Minister Nirmala Sitharaman announced cuts in corporate tax, the automobile industry has decided to use the savings to fuel capex, boost marketing and to offer discounts to consumers.

The minister slashed effective corporate tax to 25.17 percent, inclusive of cess and surcharges, applicable from April 1, 2019, translating to an annual revenue loss of Rs 1.45 lakh crore to the exchequer.

With the exception of car market leader Maruti Suzuki, no other automobile company has reduced prices of their models due to the tax cut. Delhi-based Maruti reduced prices by Rs 5,000 on 10 models including the Swift, Brezza and Baleno in September.

Its peers are using the tax benefit in other ways. Mahindra & Mahindra has indicated that it will use the money to get its capex cycle going. Managing Director Pawan Goenka has said the corporate tax reduction translated to a saving of less than 1 percent per model, thereby making it ineffective for being passed on to the consumers.

For instance, a car priced at Rs 8 lakh has seen a saving of Rs 3,000. That saving will not bring about any significant pick up in volumes since the vehicle is already carrying offers of more than Rs 60,000. On an average, auto companies spend anywhere between Rs 100-400 crore on marketing and sales promotion every year, as per industry estimates.

In this scenario, where several companies are already giving discount offers to the tune of 7-15 percent over the past few months to boost sales, it may make more sense for companies to use the additional money to finance their capital expenditure.

Bajaj Auto , on the other hand, will use the tax cut benefit to boost promotion of products and product development.

“The FM has given us a tax break. For a company like Bajaj Auto when our tax rate falls to 25 percent it is going to save us something like Rs 450-500 crore (annually). I think one of the things we are almost morally obliged to follow is to return the money in some form or fashion. Because I don’t think the intent of the government is fatten up the corporates,” said Rajiv Bajaj, managing director, Bajaj Auto, speaking on the sidelines of unveiling the electric Chetak.

Bajaj Auto, the maker of Pulsar, KTM and Avenger range of bikes, separately ran a limited period discount scheme on most of its products earlier in October. The Dominar bike, for instance, carried a cash discount of Rs 6,000, and the Pulsar 220 had a discount of Rs 5,000.

“The intent of the government is to empower us so that we do something good in return. Even if we use some tens of crores arbitrarily or a couple of hundred crores putting in for this vehicle (Chetak) for the first 2-3 years, I would say we are already reimbursed in advance four times more,” added Bajaj.