Corporate Jun 6, 2012
New Delhi: The Union government appears to be considering a proposal to make diesel more expensive for just cars and sports utility vehicles (SUVs).
At a meeting with representatives of the automobile industry and the ministry of heavy industries on Wednesday evening, finance ministry officials mooted this proposal, without explaining the mechanism of dispensing diesel for cars and SUVs at a rate higher than for trucks and agricultural use.
An auto industry representative said his counterparts had given their assent to the proposal but there was no clarity yet on how this proposal, if accepted, would be implemented.
The meeting came in the wake of Petroleum Minister S Jaipal Reddy's statement earlier that diesel cars should be taxed more though it wasn't clear how much additional revenue the government would get or whether this would be enough to deter car buyers from splurging on diesel vehicles.
An official present at this meeting explained that even if the government were to impose 5 percent additional excise duty on diesel vehicles, only Rs 2,000-2,500 crore of additional revenue would be generated. "This is a mere pittance compared to the diesel subsidy burden of over Rs 1,00,000 crore. Not only will enough additional revenue not be generated, this move will distort the market and overall car sales will decline further," said this official.
At Wednesday's meeting, finance ministry officials also wanted to know how many car buyers were likely to shift to petrol vehicles in case an additional levy was imposed on diesel cars. "How can this be determined? Also, we don't see people moving to petrol cars and instead they would prefer to postpone their purchases."
Till 2010, the price differential between diesel and petrol fuels was about 30 percent but since then it has widened and stands at about 75 percent now. 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. "We have asked the government to consider raising prices of diesel by Rs 2-4 and reducing petrol prices by Rs 7-8 to bridge the wide price gap between the two fuels. This is a much better plan than levying more tax on diesel vehicles and disincentivising car purchases on the whole," the auto industry representative said.
The plan to increase excise duties on diesel cars, always present but never pursued, is back on the table after the government backed off on the more ambitious, but unpopular, proposal to raise the price of diesel and kerosene. The proposal, which is being studied by Finance Minister Pranab Mukherjee, does not quantify the increase. But the 2010 proposal recommended the imposition of a Rs 80,000 tax on diesel vehicles. Automobile manufacturers successfully lobbied against it.
Diesel cars accounted for more than 40 percent of all new car purchases in 2011-12 - double their share in the previous year. Large, expensive SUVs and jeeps 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.
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