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In the run-up to next Union Budget, the auto industry has sought lower, as well as two separate, levels of excise duty.
In a letter to the Finance Ministry, industry body Society of Indian Automobile Manufacturers (SIAM) has demanded 12.5% excise on small cars and 20% for other passenger vehicles. Under the existing system, four rates of excise duty – ranging from 2.5% to 30% -- are charged on different models. The industry has also sought an incentive-based scrappage policy for all vehicles, including two-wheelers and commercial vehicles, that are 15 years or older.
Under the prevailing taxation regime, small cars attract an excise duty of 12.5%, mid-size cars, typically small- and mid-size sedans, are charged 24%, larger cars pay 27% and sports utility vehicles pay the highest rate of 30%. The current system puts manufacturers of sedans and utility vehicles at a disadvantage against players who are stronger in the small car segment.
In its letter, SIAM has said that automobiles are “one of the highest taxed manufactured product in India” and that “reduction and rationalisation of taxes will increase volumes and revenue and contribute more to employment and GDP”.  
The industry body has also asked for a limited-time incentive scheme for retirement of old vehicles and replacing them with modern, more fuel-efficient vehicles. The association has suggested 15 year as the phase-out age. It has stated that the replacement will help mitigate deteriorating air quality in cities, make vehicles safer and reduce inefficient consumption of fuel.
To make such a scheme attractive, it has suggested a cash incentive of Rs 4,500 for two wheelers and Rs 13,000 for three wheelers. It has sought an incentive of Rs 80,000 and Rs 90,000 for passenger and commercial vehicles, respectively. Someone opting for the incentive in return for scrapping the vehicle can use the amount for the next purchase. SIAM estimates that about 30 million vehicles, 80% of which are two wheelers, fall under this age.
Incidentally, the two-wheeler industry has been under pressure due to decline in sales of motorcycles last year, which grew a mere 0.86% in calendar year 2015. Within the segment, sales of motorcycles, which form over 60% of two-wheeler sales, declined more than 3%. This decline was offset by a 13% growth in scooter sales.
SIAM has indicated that the total outgo of the government on account of one-time vehicle retirement incentives will be Rs 56,665 crore, half of which would be needed to retire 3.6 million passenger vehicles. A total of 2.77 million passenger vehicles were sold in the country last calendar year.  The tax revenue generated by the government from new sales will be higher to the outgo, it said.
On the proposed Goods and Services Tax, the automobile industry body said all domestic indirect taxes, including road tax, R&D cess and octroi, should be subsumed within the GST. It has stated that if road tax is not subsumed within GST, the benefit of the new system will be undermined. State governments do not levy a uniform road tax on vehicles; not bringing it under GST would mean that states could continue to tinker with road tax for additional revenue.