Auto majors lobby against duty on diesel cars, will govt relent?

Auto majors in India are fighting a government proposal to raise taxes on vehicles that run on heavily subsidised diesel, fearing it will hurt a fast-growing segment of the industry.

The tax hike proposal is the latest in a series put forth by Prime Minister Manmohan Singh’s coalition government in recent days as it seeks to fend off widespread criticism that weak leadership and policy inertia are fuelling a slowdown of India.

The plan to increase excise duties on diesel cars has been on the shelf since before 2010 but is back on the table after the government backed off on a more ambitious, but unpopular, proposal to raise the price of diesel and kerosene, which is used mainly by the poor and in transport vehicles.

The proposal, which is being studied by Finance Minister Pranab Mukherjee, does not quantify the increase. But the 2010 proposal recommended the imposition of an Rs 80,000 tax. Automobile manufacturers successfully lobbied against it.

The finance ministry has asked auto makers to provide production and sales data of diesel vehicles over recent months, to better assess the market. The auto majors will come back within a week after which a decision would be taken on raising the tax on diesel cars, said SK Goel, chairman of Central Board of Excise and Customs yesterday. It has also asked them to suggest alternative measures to reduce the recent distortion in sales between petrol and diesel cars.

Top executives of automobile companies, including M&M President (Auto and Farm Equipment sectors) Pawan Goenka, Tata Motors MD (India ops) PM Telang and Maruti Suzuki India MD and CEO Shinzo Nakanishi, attended the meeting.

“Finance ministry has called the industry leaders to discuss certain issues. The diesel taxation issue was one of them. Higher taxes on diesel vehicles is a clear no from us,” Pawan Goenka, M&M president (Automotive and Farm Equipment sectors) said after the meeting. According to the companies, the difference is unsustainable. “The widening gap between the fuel prices of fuel and petrol is not sustainable and we need to reduce the gap. Therefore, we have always supported that the diesel fuel prices should go in tandem with the petrol fuel prices as they go up, but not to have a tax on diesel vehicles,” he told CNBC-TV18 on Wednesday.

Economists said the hike could help contain growing diesel consumption in the country, a major headache for the government as it grapples with ballooning budget and current account deficits. India imports more than 80 percent of its fuel needs.

The Society of Indian Automobile Manufacturers (SIAM), an industry lobby group, estimates that diesel vehicles consume less than 7 percent of the fuel’s sales in India, but the government puts consumption at closer to 15 percent.

While the government has increased the price of petrol, diesel has remained frozen since July 2011 despite higher international oil prices. Petrol is being sold at Rs 71.16 a litre against Rs 40.91 for diesel in New Delhi.

SURGE IN DEMAND

With diesel a whopping 43 percent cheaper than petrol, demand has surged for diesel-powered vehicles. They accounted for more than 40 percent of all new car purchases in India in the year to March 2012 - double their share in the previous year.

Large, expensive SUVs and jeeps, a favourite of India’s emerging middle-class, are almost exclusively powered by diesel, along with many luxury vehicles sold by Audi or BMW. Lower fuel costs for diesel cars have also seen a rise in demand for small cars that run on the fuel, despite being more expensive than their petrol equivalents.

Car manufacturers, which have invested billions in diesel car production, have said the tax hike proposal is ill-conceived.

“Countering the effect of one distortion by creating another distortion is neither good economics nor good politics,” SIAM president S Sandilya said in a statement before the meeting.

“Government needs to take positive policy measures to make petrol cars more attractive, viable and acceptable to the consumers, rather than penalize diesel cars through even higher taxes and making them more expensive to the point of unviability,” he said.

UNDER PRESSURE TO ACT

The government is under pressure to show investors that it is taking concrete steps to rein in its spending, especially on fuel and fertilizer subsidies, and attract more foreign investments.

Within the past week it has unveiled measures to limit government spending, speed up major infrastructure projects that have fallen behind schedule and announced plans to auction a higher number of slots in an upcoming sale of second generation (2G) radio waves. Revenue from the auction will help the government to plug its widening fiscal deficit.

Economists and investors have expressed scepticism at a number of the measures, including diesel tax hike proposal, saying that it remains to be seen how they will be implemented and what impact they will have on the economy.

The Oil Ministry and the Heavy Industries Ministry are divided over the tax hike proposal. The Oil Ministry wants it but the Heavy Industries Ministry says it would hurt the auto industry. Mukherjee, however, will have the final say.

Agencies