The government may slash excise duty on small passenger cars by 2% in the Union Budget in late February to boost sagging car sales. Excise duty on small cars is 12% at present.

"Automobiles are an important sector. We are looking at providing excise duty cut to benefit passenger car buyers, as the industry has been demanding it for some time," a finance ministry official privy to budget thinking said. The auto industry has demanded excise duty reduction in pre-budget consultations.

The finance ministry had extended duty benefit on small cars in the 2009 budget by slashing excise duty from 12% to 8%. But, in the past two years, then finance minister Pranab Mukherjee announced 2% hike in excise duty on small cars in each budget announcement.

Small cars have been driving growth for the automobile sector and providing much needed volumes to carmakers in India. However, sales have been falling due to high interest rates and fuel prices. During April-December 2012, passenger car sales fell 0.33%.

According to industry body, Society of Indian Automobile Manufacturers (Siam), car sales are expected to grow by a dismal 0-2% in the current financial year.

"There is need to cut excise duty to push car sales. We have asked finance ministry to cut excise duty and have been promised action," said Siam president S. Sandilya.

"Despite discounts and festive season, sales have not picked up. There is a need to attract small buyers," he added.

The finance ministry is also considering levying additional excise duty on diesel cars. There has demand from the petroleum ministry to hike excise duty on diesel cars across board to discourage diesel consumption by car owners. There is a huge gap between diesel and petrol prices due to which diesel car sales have gone up. While petrol prices have been deregulated, diesel prices remain regulated.

Earlier, a committee under Kirit S. Parikh had proposed levying additional excise duty of Rs. 80,000 on diesel vehicles.