May 31, 2023

Flip-Flop By Toyota On Investing In India

By Ashwini Agarwal
First publised on 2020-09-16 14:00:13

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In a huge setback to the Make in India initiative and the government's efforts to position India as a favourable manufacturing destination (especially when global companies are looking for alternatives to China), Toyota Motors of Japan announced today that it was suspending the launching of new cars in India and will not invest in building new manufacturing facilities due to unfriendly taxation and other policies of the government. Such a decision from a major car manufacturer can have a cascading effect and can influence other companies into making similar assessments.

The company said that the treatment of automobiles as 'sin' goods by the GST Council and the levy of "prohibitive" taxes (currently ruling at 28 percent plus additional cess between 1% and 22%) depress consumer demand as the vehicles become very costly. For a sedan with an ex-factory price of Rs 500000, the consumer ends up paying Rs 645000 as ex-showroom price. He or she will then have to fork out a substantial amount for vehicle registration, insurance and state road taxes.

It added that lower demand has saddled companies with unutilised and idle capacity and the question of further investments does not arise. Most auto companies are now speaking out against the harsh tax regime and other factors that are making it difficult for them to do business in India.

Although the company tried damage control when its Indian arm said that the company was committed to invest Rs 2000 crore in the development of "electrified products", the damage was done. Union minister Prakash Javedkar denied the reports on Toyota's announcement of suspension of investment, but investing in developing electric vehicles is not the same as launching new cars or adding capacity. Plus, the damning critique of the government's unfriendly policies stays.

The government is seized of the matter and the GST Council is expected to discuss this at its meeting on September 20. It is expected that automobiles will be brought under the 18 percent slab. The cess is likely to remain though. But even a 10 percent reduction in GST would make vehicles much cheaper if the manufacturers pass on the entire benefit to consumers. In the above example, the consumer will have to pay only Rs 595000 if taxes are reduced from 28 percent to 18 percent, a benefit of Rs 50000.

Hence, one feels that Toyota has jumped the gun. Currently, demand is well below potential due to the economic hardship caused by the pandemic. Since the Indian economy was witnessing a slowdown even before the pandemic, the fall in demand is more pronounced. But as the government is making efforts to revive the economy and the woes of the auto industry occupy a high spot in the list, Toyota should have waited for the GST Council meeting before announcing its decision.