Why a diesel car tax won't help govt slash fuel subsidies

Will an addition tax on new diesel-engine cars and utility vehicles really help reduce the government’s subsidy burden?

No, according to Crisil Research.For one thing, cars and utility vehicles account for only 12 percent of the total diesel consumed, which is just one-third of what trucks and buses consumed, according to its calculations.

If an one-time tax (estimated at Rs 90,000-Rs 1,40,000 per car) is imposed on all new diesel cars and UVs sold, the government will be able to collect about Rs 5,800-6,000 crore annually, while accounting for 16-20 percent of a typical diesel-engine car’s prices, Crisil Research said.That would account for just 12-15 percent of the government’s total diesel subsidy bill estimated for 2011-2012.

An annual use-based tax on all diesel cars and UVs, by Crisil estimates, would amount to an additional 2 percent of the vehicle price annually for personal-use cars and 5 percent for commercial-use cars.However, for collecting an annual tax, the government would have to rely on RTOs (regional transport offices), which are not well-equipped. That’s why it’s not a very viable option, according to Crisil Research.

In addition, Indian car and utility vehicle buyers “already pay 26-30 percent of the vehicle’s retail price as tax,as compared to a 16-20 percent tax in Korea and Germany and an 8-12 per cent tax in Japan (excluding scrappage and carbon tax which are annual in nature). Additional taxes on cars and UVs would, therefore, only burden consumers further,” the report said.

The research agency argued that in the long term, there is no viable alternative to hiking diesel prices. “Discouraging diesel consumption by imposing additional taxes on private and luxury diesel vehicles would only minimally cut down petroleum subsidies,” it said.

It said that to limit under-recoveries (losses on selling subsidised fuel) on diesel at last year’s level of Rs 9 per litre, the government would need to hike diesel prices by at least 10-15 per cent. Crisil Research also said thegap between petrol and diesel prices is not justified.In most countries, the difference between the two fuels is not more than 15 percent. “By contrast,in India today, petrol prices are close to 2 times higher than diesel, reflecting both higher subsidies and higher taxes on petrol,” it noted.

To sum up, if it’s really serious about cutting down subsidies, the government has to bite the bullet and hike diesel prices.

But it looks like the government is taking the easy way out. The diesel car tax might soon be reality.

View the entire report below: