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Toyota Curbs Expansion Plan in India, Continues to Invest

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Toyota Motor Corporation (TM - Free Report) has decided to halt its expansion plans in India due to the country’s elevated tax structure. The company has further issued a clarification stating that the Indian auto market is an inherent part of its international strategy and it is devoted to carrying out operations in the country. Hence, though the company will cease its expansion plans in India, it will go ahead with the investment plans.

The Japan-based automaker commenced its operations in India back in 1997. Reportedly, in August, Toyota’s Indian unit, Toyota Kirloskar Motor, had a market capture of only 2.6% in the country, down from the prior year’s roughly 5%.

India’s auto market is the fourth largest in the world. The auto biggies in the country are Maruti Suzuki India Ltd. and Hyundai Motor India Ltd., with a combined share of almost 70% of the Indian market.

However, the coronavirus pandemic has crippled the auto industry, straining auto sales in India. To revitalize the economy, Indian Prime Minister Narendra Modi had announced the “Make in India” program, in which the country is also offering incentives worth billions in a bid to attract global firms to invest in manufacturing units in the region, including production-linked allowances for automakers.

However, in India, the tax regime is very stringent for auto vehicles, including cars, two-wheelers and sports utility vehicles (excluding electric vehicles), which are subject to taxes as high as 28%. Moreover, automobiles, being luxury items in India, are subject to additional levies, within the band of 1-22% depending on various factors like the car’s type, length or engine size. This structure could bring the tax charged on an SUV to as high as 50%.
 
Thanks to this extravagant tax structure, international automakers have always battled to make place in the Indian auto space. Such hefty taxes dent the automakers’ margins and also restrict from rolling out new products. In the past, General Motors (GM - Free Report) had exited the country in 2017 as it was unable to maintain its market share. Furthermore, Ford Motor entered into a joint venture with Mahindra & Mahindra Ltd. in India after being unable to win over customers for years. This ceased independent operations of Ford in India.
 
Additionally, this tax regime makes it very expensive for Indian consumers to own a vehicle, resulting in idle capacities within the manufacturing plants.

Electric vehicles (EV) have not gained much popularity in India as very few can afford it .Tax on electric vehicles, is currently 5% in India, which will likely flare up in the future once sales pick up.
 
Toyota — peers of which include Honda Motor (HMC - Free Report) and Nissan Motor (NSANY - Free Report) — is focused on developing hybrid vehicles in India, which are subject to taxes as high as 43%, which are straining volumes and affecting the company.

However, the company expects the Indian economy to recover soon as things are gradually starting to look up. The company plans to invest Rs 2,000 crore toward the development of EVs in India, in order to cater to the domestic demand and for exports. This decision underscores the commitment of the Japanese company to its future in India.

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