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Auto firms want lower taxes to boost sales

India's automobile industry hopes taxes, which account for about half the cost of a new car, will be cut in the next Union budget to boost dropping sales.

The industry also expects a steep increase in customs duty to protect domestic automobile makers as India, in April, lifts import restrictions under a World Trade Organisation pact.

Finance Minister Yashwant Sinha will unveil on February 28 the budget for the year starting in April.

"We expect a reduction in excise duty on small cars from 40 to 32 per cent, and on utility vehicles from 32 per cent to 24 per cent," said Satish Jain, automobile analyst at brokerage ASK Raymond James.

New car sales in India fell to 418,374 in April-December, down 8.3 per cent from the same period a year ago. Sales were dragged down by poorer small-car sales, the result of price rises caused by higher local taxes and new requirements for more expensive pollution control equipment.

The Indian media has widely speculated that the government will propose different rates of excise tax on small cars up to 3.8 metres long, while leaving taxes on bigger cars untouched.

India's car market is split into a high-volume small car segment that accounts for about 36 per cent of sales, a slightly higher-priced premium small-car segment accounting for about 50 per cent of sales, and mid-size sedans making up the rest.

The Society of Indian Automobile Manufacturers wants excise duty on cars to be reduced to a uniform 32 per cent rate, and on utility vehicles, used extensively in rural areas, to 24 per cent from 32 per cent.

Utility vehicle sales in April-December rose 4.77 per cent from the same period a year earlier to 87,194.

Turning the wrong crank shaft

Many experts, including auto company executives, believe the budget would provide an even bigger boost to vehicle sales if it succeeded in stimulating India's decelerating economy.

"People buy cars because they expect incomes to increase in the future," said B V R Subbu, marketing director of Hyundai Motor India Ltd. "Business expectations make up the substance of demand."

Subbu said a budget that improved growth expectations would help the auto industry the most.

Growth in domestic industrial production slowed to 5.7 per cent in April-December from 6.4 per cent a year earlier, while India's overall economic growth has slowed to 6.0 per cent this year -- down from 6.4 last year, 6.6 per cent the previous year, and over 7.5 per cent for three straight years in the mid-1990s.

Many experts say a budget which revved up growth would do even more to benefit the commercial vehicle industry.

"If the government improves investments in infrastructure and the overall economic environment improves, demand for commercial vehicles will increase," said S Sandilya, chairman of the commercial vehicles and tractor making Eicher group.

India's medium and heavy commercial vehicle industry has been the worst hit by the slowdown in industrial growth, the stagnating agriculture sector, and an improving railways system which has been stealing traffic.

Sales of medium and heavy commercial vehicles slid 24.6 per cent in the first nine months of this fiscal year to 57,593, after growing 33.1 per cent the previous full year.

Import tariffs

However, the most keenly awaited budgetary action is the import tariffs to be set on new and used vehicles after India scraps quantitative restrictions on vehicles imports from April.

SIAM has asked the government to impose a 70 per cent duty by value on second-hand and used vehicles, and to require they adhere to the same requirements as domestically made vehicles.

"Used cars imported into India should comply with all certification and requirements stipulated by the Central Motor Vehicles Regulation which Indian car makers submit to," said Phil G Spender, managing director of Ford India Ltd.

Spender, however, is satisfied with the current basic import duty of 35 per cent as offering sufficient protection.

The total effective import duty on cars after adding an import surcharge, a special additional duty and a counter-vailing duty adds up to over 100 per cent.

SIAM has also recommended that foreign vehicle manufacturers entering India be required to invest at least $250 million to set up plants with a capacity of 100,000 passenger cars or 50,000 commercial vehicles a year.

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