How Justified is the Tax on Diesel Cars?

There’s been plenty of hoopla around diesel cars in the past month. Car makers are up in arms against any additional tax on diesel vehicles in the Union Budget (to be announced on 16^th March, 2012). The proposal is to levy additional excise duty of about Rs. 81,000 on new diesel car buys. While it is still a proposal, it surely is a lot of money.

Diesel cars already cost at least a lakh more than petrol cars. Small wonder then, that auto-makers who are always at loggerheads have set aside their differences on issues and stand united on opposing the tax on diesel cars.

Industry talking heads— like Pawan Goenka of Mahindra & Mahindra (M&M), Michael Boneham of Ford India, Sandeep Singh of Toyota Kirloskar Motors, Marc Nassif of Renault India among many others — are on the offensive on this one. Some appeared on TV to air their angst.

Here’s what they are saying: • Diesel is a great fuel. It is both more fuel efficient and cleaner when compared to petrol.
• Any additional tax on diesel cars is regressive and will directly impact car sales.
• 2011 was a bad year for passenger cars.
• The government should have a long term idea about transportation fuels. Auto companies have invested a lot in setting up diesel capacity in India.
•If you have to do something, raise the price of diesel. Why tax the cars?

Pretty heavy stuff. Except that the whole thing comes across as pretty unreasonable, when you look at the big picture. And here’s why.

First:  A chat with the CEO of one of India’s largest automobile companies put the subject in perspective. He didn’t want to be quoted though. Of the four cars he owns, he likes to compare the performance of two. “I have a Tata Aria and a Tata Nano. For a moment forget about the acquisition cost,” he says. (The Aria costs in the range of Rs. 12-14 lakh and the Nano about Rs. 2-3 lakh.) “The running cost of both these cars is actually the same. The Aria (diesel) has a fuel efficiency of 10 kmpl in the city and the Nano about 14 kmpl,” he adds. This example should tell you that there’s something disastrously wrong with the fuel policy in India. The Aria is a 2,179 cc diesel engine and the Nano about 600 cc petrol engine. Purely on the basis of running costs- it is unfair.

Why do people buy diesel cars? I checked with a large Volkswagen dealer and he said, “People come in with the idea that when they fill up at the petrol pump, diesel is far cheaper. I have hardly seen anybody who is worried about the higher acquisition cost of the car. They expect to make it up in two years,” he says. For this buyer, will a Rs. 80,000 excise duty really hurt much? The dealer says it should be a temporary hit but nothing that will have a long-term effect.

It's only fair, right? If you want cheaper fuel, pay more for the car. Is the automobile company going to subsidise your bill? Not a paisa. Most of it should — and will be — passed on to you. More importantly, it is no business of the auto makers to make a huge hue and cry about the tax.

It does not matter if the automobile industry constitutes only 2 or 15 percent of the total diesel economy. That’s because both petrol and diesel are subsidised by the Government of India today. While petrol is at Rs. 70 a litre, and diesel at Rs. 48, international crude oil prices have touched US$125 a barrel and are going strong. Oil companies are suffering huge losses; every time crude prices change, they have to go begging to the government to do something about it. Thankfully, the government is doing a great job of decontrolling the price of petrol. That’s how it is supposed to be. But when it comes to decontrol of diesel, its hands are tied.

There is a political reason for it. Vote banks. There is also a practical reason: how do you go about it? Diesel touches millions of lives -- those of farmers and the fleet trade. A price hike would lead to inflation and hurt farmers who use the fuel in  tractors and generators. Irrespective of the party in power, the long-term policy of the government is pretty clear: it will protect the interests of the weaker sections of society and farmers. That’s why the subsidy on diesel exists in the first place.

In short? The government’s diesel policy is not at all about making you, the guy who wants to buy a diesel car, happy. You are a necessary evil that the government has to live with. Auto-makers complaining that the government should have a long-term policy should understand that this is the policy: We live in a welfare state that will protect the interests of the farmers and trade.

Subsidies on fuel have existed in other parts of the world. In some countries in Europe, decontrol was followed by a colour code: fuel for cars had a different colour from that for trucks and tractors. Which is like kerosene in India, where subsidized kerosene is blue. Bottom line: implementation throws up huge practical challenges. Until those are solved, there is no alternative.

The government will seek to repair the deficit. A tax on diesel vehicles fits the bill. It's time to pay up.

The thoughts and opinions shared here are of the author.