The finance ministry is likely to cut the special excise duty on cars and multi-utility vehicles to 8 per cent from the present 16 per cent.

The effective excise duty on them will be reduced to 24 per cent, which includes the Cenvat rate of 16 per cent. Consumers can thus look forward to cheaper cars after the Budget.

According to finance ministry sources, doing away with the 16 per cent special excise duty in one go is not advisable given the revenue implications.

A two-year phase-out of the special excise duty would mitigate the impact, they said. The move would reduce excise collection by about Rs 1,200 crore (Rs 12 billion), they added.

At present, the special excise duty is confined to eight items: motor cars, multi-utility vehicles, tyres for replacement, polyester filament yarn, aerated soft drinks and soft drink concentrates, air conditioners, pan masala and chewing tobacco, and miscellaneous tobacco preparations.

Sources also said the cut in the special excise duty rate to 8 per cent was likely to be applicable to all the eight items that attracted the 16 per cent rate now. It would not be reduced for one particular sector, they said.

The single Cenvat rate of 16 per cent has stabilised since its introduction four years ago.

Of the total excise collection of about Rs 74,000 crore (Rs 740 billion) in the last fiscal year, the items under 16 per cent Cenvat contributed 62 per cent.

Those attracting a special excise duty of 16 per cent (total excise duty of 32 per cent) chipped in almost 7 per cent, around Rs 5,000 crore (Rs 50 billion).

Vijay Kelkar's task force on indirect taxes had recommended a gradual phase-out of the special excise duty over four years.

Kelkar recommended the 16 per cent special excise duty could be eliminated by reducing it to 12 per cent next year and by 4 per cent annually over the next three years.

In its representation to Kelkar, the automobile sector had said an annual 4 per cent cut in the special excise duty would not translate into any significant reduction in car prices for consumers.

It had hence sought an accelerated treatment for the automobile sector and asked for complete removal of the special excise duty next year.

Finance ministry sources, however, said eliminating the duty in one-stroke would result in a revenue loss of about Rs 2,500 crore (Rs 25 billion).

Ministry sources also said the Cenvat rate of 16 per cent had stabilized now and was unlikely to be further cut to 14 per cent as Kelkar recommended.