Why the auto industry will cry over diesel tax

The petroleum ministry has once again written to Finance Minister Pranab Mukherjee recommending a steep additional excise duty on diesel-run cars. And if the government accepts this special diesel tax proposal the price of small diesel cars is likely to shoot up by Rs 1.7 lakh while the medium and larger ones such as sedans and SUVs will cost Rs 2.55 lakh more!

The move -aimed at controling dieselisation of the economy, triggered by the widening gap between petrol and diesel prices, is sure to send the auto industry up in arms that is already reeling under rising interest costs, slower sales and poor margins andhave already opposed a proposal by the government to levy higher taxes on diesel vehicles.

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Most car majors altered their production plans this year to meet the increased demand for diesel cars. According to data released by industry body SIAM Maruti Suzuki India reported almost 6.5 percent cut in production - mainly petrol models - since the company has acknowledged a decline in petrol car demand. Ford India produced 17.33 percent fewer cars; GM rationalised production by a fourth, while Fiat India’s production was down to less than half. Volkswagen India also produced 30 percent less than May last year.

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Since diesel prices have not been deregulated, the fuel is 74 percent cheaper than petrol, which is why diesel car sales have zoomed to over 55 percent of the total 1.63 lakh units sold in May this year, up from mere 38 percent last year. Ford India had invested $72 million in adding 80,000 units of diesel engine capacity earlier in the year, Hyundai India added 50% to its capacity and Maruti Suzuki got 1,00,000 more units from Fiat for its diesel lineup.

“The difference between price of petrol and diesel is acting as an incentive for the diesel vehicle users/buyers,” Reddy wrote in his letter.

The justification for higher duty on diesel cars is that this subsidised fuel is being diverted to a section that can afford petrol cars but are opting for diesel-run ones, thereby benefiting from the subsidy scheme actually meant for the agriculture and transportation sectors. The oil ministry also needs additional revenue to help curb the under-recoveries of the oil marketing companies.

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But as Firstpost noted earlier “If the government does decide to either impose a specific tax on diesel vehicles or increase excise duty, overall car sales will fall, especially since consumers are unlikely to flock towards petrol-engine models.

On one hand the demand for petrol powered cars has already waned owing to the decontrol of petrol and recent steep hikes in its prices while on the other, imposing additional taxes on diesel fuelled cars would adversely impact demand and also take away the lucrativeness of the Indian automobile industry.

A recent SIAM report showed that domestic car sales in May registered a growth of 3.10 percent, the slowest growth since October as higher borrowing costs and fuel prices dissuaded buyers from owning new four wheelers. With no aggressive softening of interest rates by RBI, higher running cost and recent price hikes owing to the excise duty hike in Budget, it has increasingly become difficult for car manufacturers to keep up the sales momentum as demand has been adversely impacted.

In fact auto stocks were the biggest losers as sentiments turned negative after the news of the steep Rs 2,55,000 additional tax.

Shares in Mahindra and Mahindra, which has a big portfolio of diesel cars were the worst hit, falling 1.6 percent at Rs 684.55. M&M has a big portfolio of diesel cars. Maruti Suzuki was down 1.5 percent, while Tata Motors was down 1 percent.

Diesel is the most consumed fuel in the country but is sold at a discount to its imported cost. The current diesel subsidy is Rs 12.53 per litre and on an annualised basis, these amounts to Rs 100,000 crore out of the total fuel subsidy, estimated at Rs 178,498 crore in the current fiscal.

The Oil Ministry argues that the additional amount garnered from the higher excise duty can be used to make good a part of the subsidy on diesel. The Kirit Parikh Committee on energy in 2010 had also suggested a one-time additional excise duty of Rs 80,000 on diesel cars, arguing that it would offset the higher excise duty on petrol.