The Union government’s department of heavy industry and the department of revenue are jointly conducting a study to examine a reduction in excise tax for bigger cars, which will make them cheaper for consumers.
This study, said an official with the ministry of heavy industry, will seek data from the auto industry on growth projections that will determine whether the fall in prices after the excise-duty cut will stoke enough demand to make up for lost taxes.
Excise duty on cars range between 16% and 24%, depending upon the size of the vehicle. The eight percentage point differential often influences the decision making process of customers, say auto industry executives.
“It (the current excise duty regime) doesn’t allow the customers a fair evaluation and could make the difference between upgrading and not upgrading,” said Rajesh Jejurikar, chief executive of Mahindra Renault Pvt. Ltd, which makes the Logan sedan.
In the 2005-06 Union budget, the government cut excise tax by eight percentage points for small cars, bringing it to 16%. It defined small cars as vehicles that are less than four metres in length, and additionally with an engine capacity that doesn’t exceed 1.2 litres in petrol and 1.5 litres in diesel. The reduction was targeted at making cars more affordable in Asia’s fourth largest auto market.
The budget announcement led to a fall in the prices of models such as Maruti’s WagonR and Hyundai’s Santro by as much as Rs15,000, and prompted rivals such as General Motors and Honda Motor Co. to firm up plans to make small cars. Since then, several car makers have petitioned the government to make 16% the standard rate of excise duty for all categories of passenger vehicles.
On three previous occasions when the government cut excise duty of passenger vehicles, sales rose sharply. In 1999, when excise was pared from 40% to 32%, passenger car sales jumped 47%. In 2003-04, sales increased by 38% after the tax was cut to 24% from 48%.
“The industry has been asking (for) this for a long time,” said the government official, seeking anonymity since the study is at a preliminary stage. “We are collecting figures from them to see if revenues could actually increase.”
The auto industry’s contribution to excise revenues in 2005-06, the last year for which such data is available, was Rs17,144 crore, which is about 15% of the total Rs1.12 trillion collected by the government. The contribution of passenger vehicles to this is not known. The department of revenue does not release segment-wise excise figures.
“I’m not sure to what extent there will be an impact,” said K.K. Mital, fund manager with Escorts Asset Management Ltd. “If there is a cut, there may be some boost (in sales), but it is largely dependent on interest rates.”
With inflation touching a two-year high, the Reserve Bank of India has raised its benchmark rate six times in the past 18 months. This has led to a four percentage point increase in vehicle lending rates. Consequently, passenger car sales grew by 13% in April-June 2007 as compared with 20% in April-June 2006.