Last month, a senior executive of carmaker Toyota declared that the company was going to put all future investments in India on hold owing to the high taxes the country charged on cars. Even as the Japanese multinational later made a U-turn on the comment, the high taxes are a thorn in the flesh of automakers in India who are struggling to survive the pandemic-triggered slump.

India’s auto industry has been in a free-fall since March when the Narendra Modi government first announced a nationwide lockdown due to Covid-19. In April, no cars were sold in India, and things didn’t change much in May. Now, with lockdowns in most parts of India lifted, auto sales are slowly recovering but there are concerns that customers may stay away due to the overall economic slump.

And the high tax rates may keep shoppers away for a long time.

“Auto firms are right in their dissent against the existing tax rates in the country as it is already among the highest in the world,” said Archit Gupta, CEO and founder of Bengaluru-based fintech portal Cleartax. “We stand at the highest tax rate a person needs to shell out before he even gets his vehicle registered.”

In India, cars and two-wheelers (except electric vehicles) attract goods and services tax (GST) of 28%. Different quantum of cess ranging from 1-22% is added after the GST, which lead the effective tax rate to be 29-50%.

Automobile tax rates in India

Toyota was certainly not the first company to highlight the high tax problem. In August, India’s largest car manufacturer Maruti Suzuki had demanded that the government cut taxes on cars.

“Even before 2019-20, the tax on cars in India was far higher than in any other car manufacturing country in the world. In the European Union (EU), the VAT is 19% and no other taxes. In Japan, taxes are around 10%,” Maruti Suzuki India chairman RC Bhargava had said.

In September, Pune-based Force Motors, a manufacturer of popular cross-country and multi-utility vehicles, said that high taxes were restrictive for the industry, and asked for reforms.

“Globally, vehicle owners get far more incentives for their money spent on sales tax and vehicle registration. Even if other countries charge anything close to the tax rate currently levied in India, the rate comes coupled with benefits such as a higher standard of motorable roads, and affordable fuel prices,” Gupta of Cleartax said.

The auto industry is “faced with significant demand contraction. The covid-led economic downturn has only added to the negative sentiment and hence recovery in sales is likely to take longer,” said Karthik Raj, associate director at credit agency firm Care Ratings. “In addition, the industry has invested in BSVI transition translating into a higher cost of ownership.”

But these demands may fall on deaf ears because the government is in no position to offer such perks.

Government’s tax demands

Even as experts understand that automakers need tax cuts to spur sales, they believe that given the current economic environment it is highly unlikely that such demands will be met.

“A GST rate cut could help hasten the demand recovery, the absence of which will see the industry recover slowly…(But) auto sector contributes significantly to the overall GST collection. So any rate cut could have a serious bearing on the government,” said Raj of Care Ratings.

While prominent carmakers have the appetite to survive the storm as they “enjoy sizeable cash reserves and may see limited impact on their credit profile,” the smaller firms may be pushed to the verge of shutting down, warned Raj. Companies that deal with auto ancillaries, in particular, face the biggest threat.