The government is considering a move to reduce the excise on small cars to 12 per cent in the coming Budget. The duty was cut from 24 per cent to 16 per cent in the last Budget.
The rate applicable on bigger cars may also be pruned from 24 per cent to 16 per cent.
The heavy industries ministry, which is pushing for this reduction, has also suggested broadening the definition of the small car to include those with engine capacities up to 1,500 cc.
At present, cars up to 4 metres in length qualify for the lower excise rate of 16 per cent. The other clause is that their engine, if petrol-driven, should not exceed 1,200 cc. If diesel-driven, the ceiling on the engine size is 1,500 cc.
Since the last Budget, the excise on cars has been in sharp focus. The change was made because the finance minister wanted to make India a hub for the manufacture of small cars.
However, the makers of bigger cars had cried foul. Further protests had come from the two-wheeler industry. Bajaj Auto chairman Rahul Bajaj had questioned the rationale of charging the same rate of excise on small cars and two-wheelers.
Experts say these protests can become louder if the rate on small cars is cut further to 12 per cent.
If the definition of the small car is changed, some of the cars in the B + segment - Maruti's Swift, Hyundai's Getz, etc - will also qualify for the lower duty. Since auto companies have been known to pass on excise cuts to the consumer, this can help in shifting the market to bigger cars, a trend which has already been catching on.
A top official of the heavy industries ministry said that the finance ministry was seriously considering these proposals.
The excise cut is expected to bring down the price of luxury sedans like the Maruti Esteem to the Honda City and the Toyota Camry to the Mercedes C Class by Rs 50,000 to Rs 200,000.
Also the prices of small cars including hatchbacks, which form a bulk of the car market like the Hyundai Getz, Fiat Palio, Tata Indica and Maruti Swift, are expected to come down by Rs 30,000-50,000.
Even last year in an attempt to boost the auto sector the government in the Budget of 2006-07 had reduced excise duty for small cars from 24 to 16 per cent.
This time, the ministry has suggested that the reduction should be passed on to the entire industry-and more cars should fall in the "small car" ambit and pay a smaller excise duty.
Heavy industry ministry officials explained that in a bid to offset the burden of increasing fuel prices and high interest rates some corrective steps were required. "We believe that reduction in duties will boost car sales and it will thereby offset the revenue loss to the government," a ministry official said.
At present four cars from Maruti's stable (the best seller Alto, M-800, WagonR and Zen Estilo), Hyundai's Santro and one model of the Tatas - Tata Indica (the 1,200cc petrol version) - and the recently launched Chevrolet UV-A reap the excise benefit deductions for small cars.
Car sales have increased by 21 per cent in the April-November period with 871,752 units sold in the domestic market. According to the Society of Indian Automobile Manufacturers, the passenger vehicle segment is expected to touch 25,39,997 by 2012.