For every Rs 100 that the four-wheeler auto industry collects from the consumer, the Government collects approximately Rs 70 from the consumer in the form of various taxes such as excise duty, sales tax, road tax and service tax. Taxes are levied on fuels as well. This is a highly taxed industry.

The Government’s objective is to increase the share of manufacturing in the GDP of the economy from an estimated 17 per cent to at least 25 per cent so that employment gets a definite boost. The four-wheeler auto-industry is a key employment generator in the factory that manufactures the cars — in the upstream auto component and logistics industry that makes and delivers components and the downstream logistics and dealer network that sells, maintains and distributes the cars. Every car produced generates secondary and tertiary employment. It is important to appreciate the sector’s multiplier effect on economic activity.

While the auto industry is focused on generating volumes in the different segments of cars to garner profits and growth, it is certainly in the interest of the Government to lower excise rates as this will help increase volumes and garner additional tax revenue. High tax rates have the harmful effect of lowering volumes, lowering gross tax collections and ultimately lowering growth in the auto sector.

There is much confusion in defining the rich man’s vehicle — the SUV (sports utility vehicle) and the aam aadmi vehicle which is the UV (utility vehicle). The prudent way forward would be to exclude UVs up to an excisable value of Rs 12 lakh, which are used by joint families and car poolers. The practical approach would be to levy incremental tax on all those UVs/SUVs that have an exciseable value of Rs 12 lakh and more, so that the fiscal deficit target is not hurt. The reason cited by the Finance Minister in increasing taxes is that SUVs occupy more road space and parking. Not true. One SUV occupies less space than two sedans and can carry eight people; two sedans would be required for the same number of people.

Diesel vehicles of the UV variety are preferred because of the subsidised pricing offered on the diesel — clearly, what the Government needs to do is to increase diesel prices at a retail level (a beginning has been made) so that the subsidy element is removed. Bulk consumers such as the Railways may carry an element of subsidy so as not to hurt the aam aadmi. Increasing taxes on new vehicles rather than on the fuels retards the growth of the car industry.

In the context of falling sales for the auto sector, high interest rates and the manufacturing sector’s share in the GDP, the Government must refrain from increasing excise duties on this sector.

(The author is Vice-Chairman, Toyota Kirloskar Motor.)

(This article was published on March 15, 2013)
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