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Corporate Dec 3, 2012

Auto sector desperately seeking tax cuts from cash-starved govt

By Sindhu Bhattacharya

New Delhi: A troubled automobile industry is seeking growth stimulus by asking the government to lower excise duties across product categories.

But this demand comes at a time when the government is likely getting ready to levy more taxes. Which side will win this battle of perception, where cars and SUVs are seen as luxury products which need to be taxed more in the licence raj mindset, will become clear on the Budget day in February.

But for now, the auto industry appears to have been caught off-guard over taxation.

Not only is the government thinking of raising excise duty on all vehicles (except possibly large cars which are already taxed at the highest slabs of 24 percent and 27 percent) by 200 basis points, from 12 percent now to 14 percent, Kirit Parikh has again gone after diesel cars and SUVs with a vengeance by suggesting an annual additional levy on them of Rs 50,000 in the form of road tax.

Which side will win this battle of perception, where cars and SUVs are seen as luxury products which need to be taxed more in the licence raj mindset, will become clear on the Budget day in February. AFP

A senior official of the Society of Indian Automobile Manufacturers (SIAM) told Firstpost that in the lobby group's pre-budget meeting with officials of the Finance Ministry last week, only lowering of excise duty was proposed.

"There has been no discussion as far as I know on any new taxation on diesel cars," this official said.

Separately, SIAM President S Sandilya told NDTV Profit last week that any taxation on diesel vehicle, if it were to be levied, would be a very retrograde step.

He said in case the government has been thinking of additional taxes on diesel vehicles to generate more revenue, this could very well be done by raising diesel prices.

An industry official had said earlier that even if the government were to impose 5 percent additional excise duty on diesel vehicles, only Rs 2,000-2,500 crore additional revenue would be generated.

This is a pittance against the diesel subsidy burden of over Rs 1,00,000 crore. Diesel prices were increased by Rs 5 in September after a 14-month gap.

Meanwhile, Sandilya told the channel that "if the Government wants to tax diesel because of pollution, what about diesel gensets used to run air conditioning and telecom towers?"

His point is why single out diesel cars and SUVs alone when other forms of diesel pollution are rampant.

Apart from seeking excise relaxation, the auto industry has also asked the government to relax targets it had promised to achieve in 2016 in terms of vehicle sales, employment generation etc by a decade to 2026 under an Auto Mission Plan (AMP).

Already, the AMP target of growing into a $145-billion industry by 2016 may be missed by 20-25 percent at the current growth rate levels. The SIAM has already lowered its sales growth projection for passenger cars to just 1-3 percent for this fiscal from its earlier forecast of 9-11 percent growth as slowing economy, low consumer sentiment, high fuel prices and steep interest rates threaten to prolong the slowdown in the market.

Car sales had grown over 20 percent in the fiscal year that ended in March 2011, signalling the steep decline in sales in less than two years.

SIAM has also had to cut its motorcycle sales growth estimate for the year to 5-7 percent from 11-13 percent previously. Commercial vehicle sales are seen growing 3-5 percent, down from earlier estimates of 6-8 percent.

The SIAM official quoted earlier said that unless the government reverts to a stimulus package and lowers taxation on vehicles, the industry is driving fast towards a negative territory.

The industry was hoping for a revival in the festival months of October and November but retail sales have not kept up with last year's levels in most categories.

So, will the government listen to auto industry woes? Even if it relents and maintains status quo in excise duties, will it necessarily again give in on the issue of diesel taxation? Especially, now that diesel vehicle sales have been going smoothly in an otherwise tepid market?

The SIAM official hinted at a prominent "anti-diesel" lobby which is working against the interests of the automobile industry. Perhaps it is time this lobby came to the forefront and discussed its reservations openly.

by Sindhu Bhattacharya

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