The Hindu Business Line : Budget expectations

THE Finance Minister, Mr P. Chidambaram, had dangled the carrot of an 8 per cent cut in excise duty for passenger vehicles last year, but did not deliver it as part of his Budget for 2005-06. For the automobile industry, which has recorded a relatively lower rate of growth during the past 10 months compared to the blockbuster yearsearlier, the duty cut would be a much-awaited announcement when Mr Chidambaram presents the 2006 Budget later this month.

Passenger vehicles are taxed at the peak excise duty of 24 per cent. Other duty slabs are 16 per cent, which is progressively set to become the peak level, and the current mid-level of 8 per cent. Excise duty on passenger vehicles has, over the past four years, been scaled down from a high of 40 per cent to 24 per cent now.

The logic of an excise duty cut is simple: Make passenger vehicles more affordable and enable the automobile industry retain its margins at a time when input costs are going up.

A duty cut could also boost sales in the short to medium term, but as seen in the past, the effect of a commensurate reduction in car prices and the consequent increase in sales volumes are short lived. The price cuts get neutralised partially by an increase in input costs, and the progressive reduction in price differential leads to a slowdown of volume growth.

The Society of Indian Automobile Manufacturers (SIAM) has emphasised the need for excise duty cuts to cover various passenger vehicles. It has argued that the sector is one of the most heavily taxed.

According to the Auto Policy and the Draft Report of the National Manufacturing Competitiveness Council, India has the potential to become an automotive hub in the region. However, SIAM has pointed out that the Indian manufacturing sector suffers from a cost disadvantage of 12-17 per cent vis-à-vis other Asean countries owing to embedded costs. This hurdle has to be removed not only to make the industry competitive but also to bring down the acquisition costs .

SIAM not only wants the Finance Minister to cut excise duty on passenger cars and multi-utility vehicles (MUVs), which is line with the Kelkar Committee recommendations, but also chart out the roadmap for the reduction. The auto industry body feels that this will ease the effect of the manufacturing cost disadvantage that domestic industry suffers vis-à-vis other Asean countries. Also, a reduction of Customs duties will provide a level-playing field, exposing the domestic industryto international competition.

SIAM has also requested the Government to abolish the one per cent National Calamity Contingent Duty (NCCD), which is levied only on four products — polyester filament yarn, motorcars, MUVs and two-wheelers.

On the Customs duty front, SIAM has said that the import levies on cars and components in most neighbouring countries, which have a sizeable local auto industry, are higher than current Indian rates. This indicates that these countries, though having low Customs duties on other products, are keeping their domestic auto industry sufficiently protected by retaining high duties.

In its pre-Budget memorandum, SIAM has requested the Government to at least maintain status quo as regards the duty structure for import of completely built units and second-hand vehicles, so that the domestic industry is afforded a higher level of protection from the import of cheap, under-priced vehicles and components.

Apart from what the industry wants, most people want to know if the prices of cars will be lower after the Budget. Though Mr Chidambaram had hinted last year that the wait will be short for the automobile industry, political and budgetary constraints could see him put off excise duty cuts.

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