The decision to slash the excise duty on motor cars to 20 per cent in the Budget for 2004-05 may cost the finance ministry about Rs 300 crore (Rs 3 billion) in additional revenues even if the high demand levels, witnessed by the automobile industry this year, are sustained in the next.

However, the ministry may be able to reduce the special excise duty on air conditioners and tyres from 8 per cent to 4 per cent in its move to gradually bring taxes on so-called 'luxury' items to the Cenvat rate of 16 per cent.

This is because, based on the actual tax collection figures for the automobile industry over the past few years, the scope for duty cuts has become very limited.

Besides cars, the Central Board of Excise and Customs has, in the current fiscal, halved the special excise duty on tyres, soft drinks, polyester filament yarns and air conditioners to 8 per cent from 16 per cent.

These commodities, besides various tobacco products, motor spirit, and diesel, comprise almost 60 per cent of the total union excise revenue duty of the Centre.

However, tax revenue trends from automobiles till October 2003 show that there has been an almost Rs 200 crore (Rs 2 billion) loss in collections as a result.

In 2002-03, the total revenue of the Centre from excise duty on motor cars was Rs 2,500 crore (Rs 25 billion) . It was Rs 2,380 crore (Rs 23.80 billion) in 2001-02.

Tax officials are of the opinion that scrapping the special excise duty on motor cars in the next Budget will affect the revenue mop-up target, as it will mean having to forego almost Rs 800 crore (Rs 8 billion) under this head.

The automobile industry has been asking for the duty cut in the next Budget to boost car sales. The industry has seen 25 per cent growth in the current financial year.

In the backdrop of the controversy over pesticides being detected in soft drinks, the CBEC is likely to keep the tax rates on this item unchanged.

The ministry is afraid that any reduction in tax rates at this juncture may lead to a furore. However, it may soften the duty rates on tyres and air conditioners.

The loss in total revenue collections from air conditioners, if the rates are reduced to 20 per cent, will not exceed Rs 100 crore (Rs 1 billion), but the impact of a duty cut on tyres will again be nearly Rs 500 crore (Rs 5 billion) for the Centre.

In the last fiscal, the CBEC realised about Rs 400 crore (Rs 4 billion) from the duty on air conditioners and Rs 2,600 crore (Rs 26 billion) on tyres, tubes and flaps.

Driving down revenues

• In 2002-03, the total revenue of the Centre from excise duty on motor cars was Rs 2,500 crore.
• It was Rs 2,380 crore in 2001-02.
• Tax officials are of the opinion that scrapping the special excise duty on motor cars in the next Budget will affect the revenue mop-up target, as it will mean having to forego almost Rs 800 crore under this head.