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Corporate Sep 5, 2012

The diesel car tax is off

By Sindhu Bhattacharya

New Delhi: The automobile industry is heaving a sigh of relief. There is no real danger of diesel cars being slapped with an additional tax any more and, instead, the government is thinking of hiking the prices of diesel to generate revenues.

A senior official in the heavy industries ministry confirmed to Firstpost that at least two powerful bodies have voiced their opinion against any such tax and "all indications point to the government no longer thinking in terms of taxing diesel cars more".

He referred to the PM's Economic Advisory Council and a new committee formed under former Planning Commission member Kirit Parekh which have opined against levying additional taxes on diesel car buyers. There are already enough indications that the government could announce a hike in the prices of both, diesel and petrol, after the Parliament session ends on Friday.

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. Reuters

Earlier, not only was the finance ministry keen to levy an additional tax of up to Rs 80,000 on every diesel car, it had also briefly considered the possibility of making diesel fuel more expensive for just cars and sports utility vehicles (SUVs) by following a dual pricing mechanism.

Both these proposals had elicited stiff opposition from the automobile industry - taxing diesel cars would hurt the only vehicle segment which is growing in a sluggish market, and dual pricing would have been extremely difficult to implement in practice.

An industry official had told Firstpost earlier that 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.

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 68.46 a litre against Rs 41.32 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 had said.

The ministry official quoted earlier said all indications point towards an increase in petrol and diesel fuel prices soon but there is no certainty that this will happen. "Hiking diesel fuel prices is a sensitive issue....let's hope a firm decision is taken soon".

Diesel cars are the overwhelming preference of new car buyers now; 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.

by Sindhu Bhattacharya

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