43% GST Rate Will Drive Hybrid Tech Out of India: Maruti Chairman

Maruti Chairman RC Bhargava says he believes that the government will reconsider the GST rate.

Electric vehicles at 12 percent, luxury vehicles and hybrids at 43 percent and passenger cars at 28 percent with three categories of cess — that's the rate structure for automakers under the Goods and Services Tax regime now little more a month away.

In BloombergQuint’s special series, GST Countdown, we spoke with RC Bhargava, the chairman of Maruti Suzuki on the company’s GST preparedness.

In an earlier interview to BloombergQuint, you had criticised the 43 percent levy on hybrids. Would you want to hazard a guess on the government’s thinking behind keeping hybrids at 43 percent?

It is difficult to understand what the policy will be, but my personal guess is that this 43 percent happened without people actually quite understanding all the implications. My belief is that the government will reconsider this rate and not adopt a tax rate which will virtually drive hybrid technology out of the Indian market.

Since the rates have been announced, have you had a chance to engage with the government on this front and point out to them that keeping electrical vehicles at 12 percent and hybrids at 43 percent, like you said, will drive some of the players out of the market?

I think the industry as a whole has engaged with the government on this and I’m sure individual companies must be doing that too. But there’s a much greater impact on the industry as a whole and not just individual companies.

If hybrids continue to be taxed at 43 percent once GST comes in, would you at Maruti Suzuki rethink your presence in that segment?

Ultimately presence in any segment depends on whether a customer would buy a product at that price and the assessment presently is that if there is a higher cost for hybrid cars – these hybrid cars have the conventional engine plus the electric motor and other things including the bigger battery – and on that if there is 43 percent duty, the customer will not buy the product.

In your previous media interviews, you have mentioned that for GST to become successful, it needs an efficient enforcement machinery and also that it will curtail tax evasion. The way GST is shaping up, do you think these twin objectives are achievable?

I think all these objectives are very much achievable and my biggest expectation out of GST is not so much on the ease of doing business front or ease of logistics, but it is actually the long-term benefits which will accrue to industry from much better compliance and the tax laws which will lead to stronger balance sheets. This will, in turn, lead to stronger internal resource generation, and increase the ability of the company to expand, bring in new technology, buy better equipment, invest in better manpower, training, risk management, and technology.

Could you break it down for me – what aspects of GST can nudge companies in in this direction?

Today a lot of companies, particularly smaller ones, do not maintain correct accounts, they don’t want to get into the tax net because they think that it is a cumbersome process and there could be harassment. So the practice that is widely prevalent is of siphoning out, through various means, income which then goes untaxed. This weakens the bottom line of the company because then the profit is very small. So the internal resource generation of the company becomes very small. And when the resource generation is very small, the ability of the banks to lend to these companies becomes very limited.

Banks do not want to lend to companies which have such weak balance sheets and, therefore, no capacity to repay the loans. And in the absence of funds, all the things which I talked about – better technology, R&D, better manpower strength, expansion of capacity – nothing becomes possible. How do you do it if you don’t have the money?

Take me through what you are doing currently to prepare for GST. What are your conversations with your dealers and how are you, if at all, changing your manufacturing and warehousing strategy?

For the last few months, we have taken upon ourselves the very definite responsibility of working with our vendors; particularly to make sure that all vendors, including the tier 2 vendors, are enabled to become tax compliant. If they are not GST and tax complaint, the benefits of GST in terms of offsets, will not be available, and that will increase our price. So it is also in our interest to ensure that all our suppliers at every stage are able to avail offsets so that the price is not artificially increased beyond what it should be.

We have been working with these people, and we are hopeful that our supply chain will be, by and large, GST compliant by 1 July. Most of our dealers are already compliant, the one who sell the cars, because they are pretty big, their turnovers are pretty big, and they don’t escape the tax net. We have been working and giving them incentives and encouragement over the last many years to make stronger balance sheets, and that will continue.

(This article was originally published on BloombergQuint. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same. You can follow her on twitter @PayaswiniLLB. )