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Lower taxes will see more car sales: Crisil

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In India, various taxes such as excise duties and Central and State sales taxes have a cascading effect, pushing up the ex-factory price of a car by around 60 per cent.

MUMBAI, Sept. 18

RATING agency Crisil has said that passenger car demand in the country would be about 1,60,000 vehicles more every year if the tax levels are reduced by half.

The incremental demand potential would be nearly 2,80,000 cars if tax levels are lowered to one-fourth of the present levels, as per an analysis of the number of households eligible for purchasing an entry-level car at various tax levels. These numbers are, however, not validated against actual incidence of demand-price relation, according to a Crisil analyst.

According to a Crisil study, only four people in a thousand own a passenger car in India compared to 35 people per thousand in Thailand, 92 in Brazil, 187 in South Korea and over 450 in the developed world. Despite such low penetration level in India, the domestic passenger car industry continued to move in low gear, it said. According to the rating agency's analysis, the demand sluggishness is largely due to the high acquisition cost of passenger cars in relation to per capita income levels in India.

While it takes around 28 months' average salary to purchase a car in India, it takes around 16 months in Thailand, eight months in Malaysia and as low as three months in the US and Western Europe.

A large component of a passenger car's cost in India is taxes, which are amongst the highest in the world, it said. In India, various taxes such as excise duties and Central and State sales taxes have a cascading effect, pushing up the ex-factory price of a car by around 60 per cent. This is much higher than that paid by customers in the US at around four per cent, Japan, at around 10 per cent, Europe, at an average of 15-20 per cent or even Brazil, at around 23 per cent.

The likely revenue reduction for the Government due to lower tax levels would be compensated by incremental revenues on account of higher consumption of petrol, taxes on incremental sales of cars, higher corporate taxes of car manufacturers and other knock-on effects of increasing motorisation. For the industry, it will mean better utilisation of existing capacities for the various car and related auto-ancillary manufacturers.

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