Raise tax on diesel cars

The forthcoming Union Budget of 2012-13 needs to take the urgent decision to tax diesel cars higher to prevent misuse of the under-taxed and under-priced fuel in cars. The government and the oil marketing companies cannot continue to shoulder the burden of subsidies and under recovery for luxury use. Increased use of diesel by cars will also increase public health risks.

Without fiscal brakes in the forthcoming budget, India will pay a heavy price. With each litre of petrol replaced by diesel to run a car, the excise earnings of the government drops seven times.  In 2011-12, diesel cars will account for over 40 per cent of the total car sales in the country. Also, for the first time ever, bigger diesel cars and SUVs are selling more.

The revenue losses will compound with the increased share of diesel cars and SUVs in the market. Already the effect of increased use of diesel in cars is so dramatic that the excise earnings from both diesel and petrol has nearly equalled even though petrol pays much higher tax.

If diesel cars were paying the same excise for lifetime fuel use as petrol, the potential excise revenue can be more than Rs 87,000 crore from the new car fleet sold or to be sold between 2009 and 2015. It is, therefore, a step forward that the petroleum minister Jaipal Reddy has proposed higher taxes on diesel cars to the Union finance ministry.

Alarming pointers

There is no slowdown in dieselisation. The Petroleum Planning and Analysis Cell of the Union ministry of petroleum and natural gas, says petrol consumption has slowed down, while diesel use has registered 6.4 per cent growth.

Cheap diesel is pushing the car market towards bigger cars that guzzle more fuel. While 87 per cent of all petrol cars sold in the country have engine size less than 1,200 cc, about 40 per cent of total diesel cars sold are above the 1,500 cc range. In 2011-12, cars above 2,000 cc—which include SUVs—have registered a 41 per cent growth rate in sales.

Car industry is on an overdrive to produce larger diesel cars. There are 24 diesel car models in the engine size class range of less than 1,400 cc; 42 models in the range 1,401-2,000 cc; and 61 models in the class above 2,000 cc engines. Thus more models, which are fuel guzzlers, are proliferating in the big car and SUV segments.

Public health implications are also alarming. Even what Indian industry calls “clean diesel” is far from clean in terms of toxicity. Emission data shows that today’s diesel cars, on an average, emit seven times more particulates and three to five times more nitrogen oxides than petrol cars. There is sufficient evidence that tiny particulates emitted from a diesel vehicle are toxic and carcinogenic. This must be accounted for in any calculation of the costs of diesel in the economy.

Denial mode

The automobile industry is desperate to stall any move to tax the car high. Estimates reportedly arrived at by Society for Indian Automobile Manufacturers (SIAM) and the 12th Planning Working Group on Petroleum Sector (WGP) try to prove that diesel cars use a negligible amount of diesel. Personal cars, SUVs and taxis together consume only 5 per cent of the total diesel used in the country. Cars alone use 0.6 percent. This challenges another set of estimates made by the government’s own Petroleum Planning and Analysis Cell (PPAC)—and cited in the Kirit Parikh Committee Report of 2010. PPAC says diesel passenger cars use 15 per cent of diesel and are the second largest users of the fuel in the country.

The new jugglery reduces the relative share of diesel use of the critical sectors of economy—transport, industry and power quite significantly. Strangely enough, even though overall diesel consumption shows increase since 2008-09 by as much as 20 per cent, the share of road transport sector remains unchanged in the SIAM/WGP estimates. But it increases the share of diesel passenger three-wheelers by several times than diesel cars. This looks unlikely as on an average 130,000 passenger diesel three-wheelers are sold per year, whereas close to 700,000 to 800,000 diesel cars and SUVs are sold each year now. Even if three-wheelers are driven more, they cannot possibly use more diesel than cars and SUVs.

Falls in its own trap

Even their juggled numbers cannot hide the massive dieselisation of the car segment. Even at 5 per cent as the SIAM/WGP estimate, cars, taxis and jeeps are using up to 3,276 TMT (thousand metric tonnes) of diesel. Petrol cars are using about 4,272 TMT petrol—a third of the total petrol consumed in the country. This means diesel fuel is already 40 per cent of the total fuel used in the car and SUV segment.

Neither the government nor the industry can ignore that the real concern is about the rapid increase in the use of diesel in car and SUV segments. In 2010-11, the car industry sold about 800,000 diesel cars (34 per cent more sales than the previous year). Even if a much moderate and flat growth rate of 20 per cent a year until 2020 is assumed, the total diesel cars then will be double the number of the total car sales today.

Learn from others

Even other governments are taking action to discourage use of conventional and under-taxed diesel in cars. Brazil, that taxes diesel low has banned diesel cars. In Denmark, diesel cars are taxed higher to offset the lower prices of the fuel. In China, taxes do not differentiate between petrol and diesel, while Sri Lanka uses taxation to discourage diesel cars and has reversed the dieselisation trend and diesel fuel consumption in its transport sector.

Take action

The forthcoming budget must impose an effective and an additional tax on diesel cars. The Kirit Parikh Committee has proposed Rs 81,000 additional excise duty as an equaliser. While this amount should be imposed on cars with engines less than 1,400 cc, the amount should be doubled for the large segment (the luxury cars which use up more fuel) for more equitable sharing of the burden.

The additional revenue should be used to fund production of clean diesel with 10 ppm sulphur to make a quick transition to Euro V/VI emissions standards.

At the same time taxes on buses should be further lowered to help strengthen public transport and control overall car growth.