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Budget 2013-14: Higher tax on SUVs unlikely to hurt sales

The Finance Minister's decision to raise the excise duty to 30 per cent from the present 27 per cent will make SUVs a tad costlier.

N. Madhavan        Last Updated: February 28, 2013  | 14:34 IST

Sports utility vehicles are the saving grace for the Indian passenger vehicles sector . This segment grew by 57 per cent during the 10-month period from April 2012 to January 2013. In this period 451,000 units were sold, up from 288,000 in the corresponding period of the previous year. This included models such as the Fortuner, Sumo, XUV 500, Scorpio and Pajero. The passenger car segment - the industry's mainstay --- on the other hand saw demand declining by about two per cent in this period.

The Finance Minister's decision to raise the excise duty to 30 per cent from the present 27 per cent will make SUVs a tad costlier.

The minister chose to levy the higher duty on the grounds that SUVs are large and occupy more space on the road. His decision could also be driven by the fact that most of these expensive vehicles run on diesel and don't deserve to benefit from the subsidy on this type of fuel.

Will this move hurt demand for SUVs? Not likely, say auto experts. The hike in prices (assuming car manufacturers pass on the cost to the consumer) is not too much for buyers of such vehicles. Besides, the hike does not apply to SUVs purchased for use as taxis - by far the largest source of demand in the segment.

In a way, the Finance Minister has tried to partially correct the misdirected subsidy to the rich. Had he raised the duty on all diesel vehicles, it would have created major problems for the sector, which is grappling with lower demand. By focussing only on SUVs, for which demand has increased, he will not upset the apple-cart, and will at least partly offset the diesel subsidy burden.

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