Automakers have asked the government to halve the excise duty on cars and utility vehicles to 16 per cent to spur demand.
The Society of Indian Automobile Manufacturers, which represents about 40 automakers, said in a memorandum to the government that it should lower the duty in its upcoming Budget.
Taxes and other levies, at more than 65 per cent, are "not economically tenable", it said.
It said taxes should not exceed 25 per cent, with the central government imposing a value-added tax of not more than 16 per cent and state governments levying a sales tax of not more than nine per cent.
The government will outline its new tax proposals in February, when it is due to present its Budget for the financial year beginning April 2003.
Analysts said the government would hesitate to cut a good source of revenue as it faces a big fiscal deficit but that a cut in taxes is what is required to stimulate the sector.
The Credit Rating and Information Services of India Ltd, a leading rating agency, forecast in September that car demand would jump nearly 30 percent if taxes were halved.
An economic think-tank estimates car demand will grow by 10 per cent a year for the next decade, helped by rising incomes and low penetration.
Only four of every 1,000 Indians now own cars, compared with 35 in Thailand, 92 in Brazil, 187 in South Korea and 450 in the developed world.
In the past year to March, 15 vehicle makers sold just 689,830 cars and utility vehicles in the domestic market.