Analysts not in favour of proposal to tax diesel cars

Transport Zone / Jul 15, 2012

Diesel car buyers may have to shell out more for the vehicle if finance ministry accepts the suggestion of Union Petroleum Minister S Jaipal Reddy to impose a steep additional excise duty on diesel-run cars. Reddy argued for imposition of Rs 170,000 excise duty on small cars and Rs 255,000 on medium and larger diesel-run cars like sedan and sports and multi-utility vehicles.

The revenue collection from the proposed additional excise duty would be used for paying under recoveries of oil marketing companies (OMCs) from the sale of diesel at below market price. OMCs are expected to incur over Rs 1 trillion in under recoveries from diesel sales in 2012-13 compared to Rs 81,000 crore in 2011-12.

The move by the petroleum minister is also aimed at curbing the practice of misuse of subsidy on diesel and prevent dieselization of the economy. Prospective car buyers prefer diesel cars over petrol cars as the price of petrol is decontrolled (and hence higher than diesel). This led to criticism that government’s subsidy on diesel goes to rich car buyers who can afford to pay market price for the fuel.

Growth of diesel consumption rose to 7.2 percent in 2011-12 from 6.2 percent in the previous financial year. Meanwhile, growth in petrol consumption slipped to 5.6 percent in 2011-12 from 10.7 percent in the earlier financial year.

However, experts opine that the proposal to impose additional excise duty may not reduce diesel consumption and in fact would only result in distortion.

In a telephonic interview to First Infocentre, Madan Sabnavis, Chief Economist, Care Ratings remarked the following: “Excise duty on diesel cars may not reduce diesel consumption because a large part of diesel consumption comes from the existing diesel car owners. While the proposed excise duty may deter new car sales, it would not do anything to reduce consumption of diesel by existing diesel car owners.”

“In fact, with the imposition of such a duty, future car buyers may buy petrol cars and then replace the petrol engine with diesel engine, thereby escaping the excise duty,” Sabnavis said.

Moreover, industry experts feel that the impact of such an additional duty may differ from segment to segment. While the duty may not affect sale of high-end diesel cars, it may have some depressing effect on the sale of low-end cars, experts said.

According to a poll conducted by Project Reporter, 61 percent of participants don’t favour petroleum minister’s suggestion to impose additional excise duty, while 32 percent welcome it. The remaining participants took neutral stance.

Recently, Planning Commission Deputy Chairman Montek Singh Ahluwalia also echoed the same view when he said to a leading media that the correct thing to do is to adjust diesel price and not impose tax on diesel cars.

Sabnavis said the best way to discourage diesel consumption is to impose a higher premium for motor insurance on diesel cars than to petrol cars. He said this would ensure that both the prospective diesel-car buyers and the existing ones pay higher insurance cost, unlike the proposed excise duty which affects only the new buyers.