According to a note sent by Telco to the state government, the state would earn Rs 968 crore from sales tax on the Indica's inputs (the exemption is on the finished product alone) during the two-year waiver period. As against this, the state would lose only Rs 96.79 crore in revenues in the first two years of operations on account of the exemption in sales tax and central sales tax. In addition to this, earnings from excise duty during a 10-year period could be to the tune of Rs 7,935 crore, according to the company's estimates. A good chunk of this collection would accrue to Maharashtra from the central pool.

The numbers relating to revenues from taxes other than excise would be applicable only if Telco is able to sell 75,000 cars in the first 24 months of operations. According to estimates sent to the state government, Telco hopes to sell10,000 cars in the first three months, of which 1,850 will be in Maharashtra. In the second year, 1999-2000, the company estimates all-India sales at 30,000, of which Maharashtra's share would be 5,550.

After that, in the first three quarters of the following year, sales have been pegged at 35,000 units, 6,475 of which will be in the state. According to analysts, if Telco passes on the sales tax benefits even partially to the consumer by dropping the price of the car, bookings could go up significantly, translating into higher sales. In this case the state government's revenue earning could be even higher in the form of its share of central excise and higher earnings from outsourced inputs.

For the 24-month period of tax waiver, the state would have earned Rs 34.86 crore on sales tax, 29.99 crore on central sales tax (at 2 percent) and Rs 31.95 crore on net purchase tax on inputs. However, the actual amount of revenue forgone would depend on the sales figures of the Indica; if it sells more thanprojected, the opportunity loss would be more.

Insight

Moderate projections
Apart from the gains to the state, what is interesting are the sales figures projected. Setting a modest sales target of 30,000 cars in fiscal 1999-2000 and 35,000 cars in fiscal 2000-2001 would mean that the car division would make losses in the first two years of operation. Telco has in the past put its breakeven level at 60,000 cars per annum. There could be two reasons why Telco may have opted for a modest sales projection. One, this would have helped its case for a sales tax waiver since the revenue loss projected would be lower. The other reason is that the company may not pass on the duty reliefs to expand volumes.

If the latter is true, it stands in direct contrast to Telco's counterparts in Latin America where manufacturers had passed on the reduction in state levies to customers by lowering prices. The subsequent increase in sales volumes compensated for the loss in revenue earned per vehicle, whichresulted in benefits to both the government and the companies.