Extra tax proposal on diesel cars senseless, says SIAM

Following a proposal by the petroleum ministry to levy an extra tax on diesel cars to offset the vast gap between petrol and diesel prices in India, the Society of Indian Car Manufacturers (SIAM) has today written to finance secretary R S Gujral saying such a move will slow down sales and create ""serious distortions"" in the industry.

The Indian car market is already in the grip of a slowdown and any additional tax will further retard demand, SIAM said.

''An Increase in excise duty on diesel cars would not serve any useful purpose in terms of reducing the subsidy bill of the government. On the other hand, it would create serious distortions in the industry taxation structure and provide a disincentive to the highly fuel-efficient diesel technologies developed by the industry with huge investments," SIAM director-general Vishnu Mathur said in the letter.
 
Last week, officials in the petrol ministry had said that the proposal to levy an extra duty of Rs1.7-2.55 lakh on diesel cars had been put before the finance ministry; and they were confident it would be approved.

However, SIAM president S Sandilya said in an interview with CNBC-TV18 that the possibility of such a tax being introduced is low. ''The finance ministry is fairly well aware that the diesel consumption by cars is a very small percentage of the total diesel consumption in the country. Given that, any incremental duty will be a retrograde step,'' he said.

He elaborated, ''If you increase the duty significantly and the volumes go down you will not only lose the incremental revenue that you want to get, but you will also lose the base revenue that you are getting today out of the number of vehicles that are getting sold in the market. Therefore, government stands to lose out on revenue. If the objective is not revenue but control diesel consumption, the consumption by cars is miniscule. So what are you trying to control?''
 
Siam's response to the Government comes after a meeting that leading automakers had with Gujral earlier this month on the issue. The petroleum ministry has made a strong pitch for imposing an extra tax on diesel cars to make up for the subsidy that their buyers get on account of diesel's regulated pricing. The Finance Ministry had earlier said that it is looking into the matter.

Siam in its letter claimed that diesel usage by passenger vehicles is about 6.8 per cent, of which only about 1.56 per cent is for personal vehicles while the rest goes into taxis. Personal passenger car owners are ""miniscule"" and insignificant in the entire diesel usage and other industries were bigger consumers of the subsidised fuel, SIAM said.

Carmakers, including companies like Mahindra & Mahindra and Tata Motors which derive the bulk of their sales from diesel-powered utility vehicles, have long argued that hiking diesel prices is a far more logical step than taxing diesel cars. Economists are also virtually unanimous in saying that increasing car taxes is a perverse and retrograde way to avoid a much-needed hike in diesel prices.

"It is also pertinent to point out that much larger quantum of diesel is consumed by diesel-generating sets being used by offices, malls, residential complexes, shops, hotels, restaurants, mobile towers, etc for back-up power generation," SIAM pointed out.
 
SIAM also argued that excise duty on large cars is already high at 27 per cent and any new tax will make them even more expensive.
 
It suggested that the government decontrol prices of diesel as it has done with petrol; even if it is a partial decontrol.
 
"The price differential between diesel and petrol was about 25-30 per cent till June 2010; now since May it has increased to about 75 per cent. This type of price differential is not sustainable for the economy as a whole. Worldwide the differential between price of diesel and petrol has been around 10 per cent," Mathur said in the letter.