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Corporate Tax Cut: M&M’s Parthasarathy On The Tax Disadvantage For Existing Manufacturers

Lower tax rate for new manufacturing firms poses two issues for already existing companies, says M&M’s chief financial officer.

 Mahindra and Mahindra Ltd. XUV 500 sport-utility vehicles (SUV) move along a conveyor on the production line at the company’s facility in Chakan, Maharashtra, India (Photographer: Udit Kulshrestha/Bloomberg)
Mahindra and Mahindra Ltd. XUV 500 sport-utility vehicles (SUV) move along a conveyor on the production line at the company’s facility in Chakan, Maharashtra, India (Photographer: Udit Kulshrestha/Bloomberg)

The government offering a lower tax rate for new manufacturing companies could create a “slightly uneven” playing field for the already existing companies in the sector, according to Mahindra and Mahindra Ltd.’s Chief Financial Officer VS Parthasarathy.

“I am quite clear why the government is doing it. I also think the logic is sound. But it is a little uneven level field, positively tilted in favour of new companies coming in and getting a 15 percent tax regime versus existing ones that will pay a higher tax,” Parthasarathy told BloombergQuint. “This is one thing which causes a little bit concern. That what if new companies come and get an advantage and there is a shift in favour of the newcomers.”

To be sure, existing companies too can avail the benefit of a lower tax rate if they choose to spin-off a new business and make a greenfield investment. But Parthasarathy said there are two parts to it.

One, he explained, is that this is not incentivising brownfield expansion. “Let’s say I have invested Rs 5,000-7,000 crore in my Chakan plant. I have invested already two years. That investment cost suffers a 25 percent tax rate. And the new company investing the same thing suffers 15 percent. So to that extent, competition between current invested manufacturing versus new manufacturing is one thing.”

The other, he said, is a problem of strategy. If there is a new business to be spun off, it should make economic sense to do it, Parthasarathy said. “You can't just open a new company. You need to have a clear logic and strategy behind it. So if I need to invest in Chakan in that plant itself, then it becomes difficult to open a new company instead.”

Here are other highlights of the conversation:

  • M&M will consider all options on how to use the tax savings, including discounts, higher dividends and higher salary dole outs. “How we do it and how much we do is a matter of strategy.”
  • If the demand trajectory changes during the festive season, M&M can consider capacity enhancement. “If demand should go up, and I expect it to, then investment will follow.”
  • There is more to be done on the consumption front. At this point of time, the government could consider giving it in the form of infrastructure projects which then gives a boost to household incomes, he said. “This ‘jugalbandi’ we'll have to do.”
  • M&M will commit to making investment irrespective of demand coming back in the short term. That's because a plant will anyway take longer to set up. “Next two-three quarters have to see a demand pickup. And when it happens, capacity will be required.”