Tax cuts meant to protect corporate profits, of no benefit to consumers

Auto industry rules out price cuts

Pawan Goenka, managing director of Mahindra and Mahindra Ltd (M&M), ruled out any move to pass on the benefits of corporate tax rate cut to the consumers by the way of reduction in the vehicle prices sold by M&M. “One thing - somehow a wrong expectation has been coming out in the last two-three days that because of this, auto companies would be able to or are willing to reduce prices significantly,” Goenka told a TV channel.

“The call that the Government of India has taken is rather than doing some short-term stimulus, they are going to put money in the hands of the corporate for medium-term and long-term growth and this will get the Capex (capital expenditure) cycle going. It will get a higher capacity, higher employment going rather than an immediate demand stimulus. If you do the math, even if we were to transfer all of the tax benefits that we will get, 100 per cent of it in vehicle pricing, we will be able to reduce vehicle price by about 0.5 per cent, which means on a ₹8 lakh car by about ₹3,000,” he added. “That (corporate tax cut) is not going to be a demand stimulus and most auto companies including M&M have already given a fairly significant increase in incentive for the festive season, from 3 to 7 per cent. So I don’t think there is any room for any further passing on of the tax benefit," he categorically stated. So, the tax cut is not meant to be passed on to consumers but to be retained by the industry.

RC Bhargava, chairman of India's largest carmaker Maruti Suzuki, said that tax savings after the Union Finance Minister’s announcement is miniscule and not sufficient for India’s largest carmaker to reduce the price of its offerings.

Rajiv Bajaj, managing director of Bajaj Auto, echoed Bhargava and Goenka’s sentiments in ruling out price cuts for the prospective buyers in the coming months. "FM has reimbursed to us all the money that we are putting out both in terms of a consumer offer and also the media spend that is behind it. So if you look at it that way, it is not insignificant,” he said.

However, both Goenka and Bhargava are non-committal on any immediate Capex programmes. The auto industry is already partially shutting down its existing plants for a few days in a month due to lack of demand. Rajiv Bajaj, though, has indicated that the tax cut will bolster his company's ability to invest in new technology for electric vehicles.

So the auto industry will neither pass on the benefit of the tax cut to consumers, nor it has any immediate Capex programmes on the table. So, the industry will retain the tax benefit as a war chest for the future.

Metal industry will deleverage the balance sheets:

From the views of Tata Steel, it can be reasonably assumed that the metal industry companies will utilise the extra cash accruing to them due to corporate tax cut, to reduce their debt and to deleverage their balance sheets. TV Narendran, Global CEO and managing director of Tata Steel, said that the company will use the tax benefit to deleverage its balance sheet. All major metal companies, though profit-making, are weighed down by large debts on their balance sheets. Hence, it is expected that most of the metal companies will use the extra cash to reduce their debt. Metal prices are already subdued and hence these companies may not affect any price reductions because of the tax cut.

FMCG industry may spend on more advertisement:

As per views of some FMCG companies obtained by a big-4 firm, these companies have indicated that they will utilise the extra cash accruing to them due to the tax cut, on higher spend on advertisement and sales promotion activities. It looks, many FMCG companies have reduced their ad spends to protect their margins in a slowing economy. Now they may restore their normal ad spends. There are no clear signals from any of the major FMCG companies to pass on the tax benefit to consumers by the way of price cuts. Most FMCG companies are debt-free. They may also distribute part of the tax benefit to their shareholders by way of higher dividends.

Conglomerates may use it for share buy-backs:

SN Subrahmanyan, CEO and MD, L&T, told a TV channel that what the Union Finance Minister and government have done is probably the 'single biggest tax reform'. "This is a fantastic moment from all points of view. This is a transformational intent and the content out of it would be multifarious and reactions would be numerous from many points of view. Something like this is required by the private sector because for the last three-four years we have been lacking private sector investments for various reasons. Therefore, in some manner, this ensures that the private profit and loss (P&L) gets back into shape".

The buyback tax has been revised and SEBI has also released revised norms for calculation of buybacks. When asked if the company was still planning to do a buyback or if it was off the table post the acquisition of Mindtree, he replied, “Buyback is always an option because, in an organisation like us, we always think about investors and the returns to the investors. One needs to be conscious that we did attempt it. For some reasons of internal calculations, it did not move forward. Though the overall scheme has been announced, the devil is in the details as always. One needs to see how this 1:6 and other criteria that have been put there, works out. If it is favourably disposed, we will definitely go back to what we thought about at that time for sure.” So he indicated that L&T may revive the share buyback proposal.

Neither demand side boost, nor supply side boost:

From the reactions of industry majors, it looks that they will not pass on the benefits of corporate tax cuts to consumers by reducing the prices of their products. They have also not indicated any immediate Capex or investment plans, justifiably so, as the present capacity utilisation of industry is low, at less than 80 per cent. So, it looks like the corporate tax cuts are neither a demand-side boost nor a supply-side boost. India is currently not facing any supply-side constraints for manufactured goods. If India wanted to attract global manufacturing companies for 'Make in India', corporate tax cut only for the new companies to 15 per cent (17 per cent including cess and surcharge) would have been sufficient. There was no necessity of any corporate tax cut to existing companies to boost new investments. It seems that the corporate tax cut to 22 per cent (25.17 per cent including cess and surcharge) to existing companies is intended to protect their profit margins and to dissuade global investors from fleeing from the Indian stock markets.

(V Venkateswara Rao is a retired finance professional and a freelance writer).