Sure, Taxes on Toyota Hybrids Can Be Cut, But The Company’s Problems Go Beyond GST Woes

One has to read the Toyota anguish about high taxation with a lot more nuance that we did at first chance. A Toyota director, Shekar Viswanathan, has said that his company felt India did not want it to manufacture in India. Bloomberg quoted Viswanathan as saying, “The message we are getting, after we have come here and invested money, is that we don’t want you… we won’t exit India, but we won’t scale up.”

This petulant statement forced Vikram Kirloskar, vice-chairman of the company, to step in to contain the political damage, saying the company planned to invest another Rs 2,000 crore this fiscal.

Clearly, the Viswanathan statement is not related to direct taxes, which are now at their lowest levels in decades. It pertains to indirect taxes, where over and above a 28 per cent goods and services tax (GST), we have a cess. This cess ranges from 1 per cent to 22 per cent, with higher-end cars attracting higher levels.

The key to Viswanathan’s grouse lies in Toyota’s strong suit in hybrid cars. These cars cannot be manufactured in substantial quantities or even sold in India through the import of CKD/SKD kits due to high indirect taxes and customs duties. These taxes constrict the market for hybrid cars at a time when the government is trying to promote electric vehicles (EVs) through an ultra-low GST rate of 5 per cent.

If the government wants to curtail pollution, there clearly is a need to cut the tax rate on hybrids, if not to 5 per cent levels, then at least to 12-18 per cent. This can, and should, be done as soon as the fiscal situation allows it, for hybrids are important crossover vehicles between pure fossil-fuel based cars and electric cars. In the foreseeable future, India will anyway not have adequate charging infrastructure for a large-scale shift to EVs.

What spooked the Toyota director was probably talk in the GST Council about extending the cess well beyond 2022, which means the higher-end hybrids that it wants to sell will remain out of reach for more than a handful of customers for at least another five to 10 years.

But here’s the real problem: even with a cut in taxes for hybrids, it is unlikely that Toyota will gain much market share, for its hybrids are all over-priced for the Indian market.

The Prius, its hall-of-fame hybrid, costs over Rs 45 lakh in India, but at that price it will be compared with other luxury cars like BMW X1 and Jaguar XE. When cars cost more than Rs 30 lakh, it is doubtful whether the price of fuel or pollution potential will be major purchase considerations for the super-rich, who are the only ones who can afford these vehicles.

At those prices, buyers are looking for an adrenaline-pump, not the likely bill at the petrol pump. Even in the west, where taxes are not discriminatory, the cheapest hybrid is much costlier than a petrol vehicle.

Toyota in India has been a one-car wonder. It has a super-hit in the people-carrier segment, the Innova, but has not set the Indian markets on fire with its smaller-end hatchbacks and sub-compacts and compacts. This speaks more about it long-term inability to understand the Indian consumer when Maruti, Hyundai and even Tata Motor have managed to do so. Toyota does not have the mass-end cars that Indians will buy.

There is also another factor that all automobile manufacturers – and not just Toyota – forget. Their early success in India over the last two decades was the result of a massive failure of public policy, and the willingness of policy-makers to privilege personal transport vehicles over public transport.

A country which had not even entered lower middle income status was investing in automobiles at the rate of over 20 million a year till recently, thanks basically to a failure of expansion in public transport. An automobile boom that should have begun around now, when we have become a lower-middle income country, began prematurely more than a decade ago.

In the Indian context, where (before Covid-19), consumers were increasingly seeking solutions in shared mobility (app-based taxi services, etc), car makers were slipping badly even as bike makers were doing well. India is still a bike market rather than a mass car market, except in small cars.

Toyota’s problem is that it is in the wrong consumer categories at the wrong time in the wrong place. Its only success, and that is not an accident, is Innova, which is as close as one can get to be a public carrier below the minibus category.

Things may change with lower taxes, especially at the upper end of the consuming classes, but it is unlikely that volumes are going to be anywhere near where this Japanese icon will be happy with.

More than the India-push factor, what Toyota had not foreseen was that it had no particular pull, or attraction, for Indian consumers. That won’t change much even if taxes are cut.