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Excise levy may be raised on diesel cars-Amrit Raj

Finance ministry asks automobile sector to submit a report on the impact of such a move within a week’s time

The government appears to have made up its mind to increase excise duty on diesel cars to neutralize the advantage of the state subsidy that has prompted motorists to increasingly favour vehicles powered by the fuel that’s Rs.30 a litre cheaper at the pump than petrol.

Indications that the government is leaning towards an increase in the levy emerged at a meeting summoned by the finance ministry on Wednesday, said four people, including a government official, familiar with the matter. The decision may be taken before the monsoon session of Parliament begins sometime in July.

The meeting, chaired by finance secretary R.S. Gujral, was attended by executives of leading auto makers and officials of the the department of heavy industries as well as representatives of the auto industry lobby Society of Indian Automobile Manufacturers (Siam).

“The finance ministry wants to do away with the impression that rich people are getting benefited by the subsidy given on diesel,” said a senior government official who attended the meeting and spoke on condition of anonymity. “The tone of the ministry officials during the meeting clearly suggested that they are adamant on increasing the duty amid rising pressure from various quarters.”

Periodic increases in the price of petrol and the subsidy on diesel, the price of which is administered by the government and has remained steady, has led to a surge in demand for diesel cars over petrol versions. Diesel-run cars make up 90% of the sales at car makers such as Tata Motors Ltd and Mahindra and Mahindra Ltd (M&M). In 2011-12, state-run oil refiners lost Rs.80,000 crore because of selling diesel below the cost of production.

If the decision to increase excise duty on diesel vehicles does go through, it will be bad news for auto makers that have already seen their sales flag in the face of slowing economic growth, which hit a nine-year low of 5.3% in the quarter ended March. Auto sales are equivalent of 6.5% of India’s gross domestic product (GDP).

The government currently imposes similar duties on petrol and diesel cars. The excise on cars more than 4 metres in length and with an engine capacity of 1500cc or more is 27%. It’s 24% on models that are more than 4 metres in length, but have smaller engines, while it’s 12% on smaller cars.

The finance ministry has asked the automobile industry to submit a report on issues raised in Wednesday’s meeting within a week’s time, said the government official cited above.

“The finance ministry wants to know that if the government increases duty on diesel cars, how will the hike impact the investment in automobile sector and sale of petrol cars,” said a senior official at the Central Board of Excise and Customs (CBEC), who also requested anonymity.

The ministry has also asked the industry to submit data on sales and production of diesel and petrol cars. It asked the industry to suggest options available should the government decide not to tinker with the excise duty on diesel cars and sport utility vehicles (SUVs).

Auto industry executives said investments in the industry would be hurt by any excise duty hike on diesel cars.

“The government is likely to raise the excise duty by increasing the price of diesel cars by Rs.80,000, which will fetch Rs.2,500 crore to the government. We do not think this will solve the issue,” said Ford India Pvt. Ltd president and managing director Michael Boneham. “Instead you increase the price of diesel by Rs.1. That way the government will earn Rs.8,000 crore.”

The automobile industry plans to hold a press briefing on the issue on Thursday.

In 2010, the Kirit Parikh committee suggested the imposition of Rs.80,000 excise duty on diesel cars, saying that 15% of the fuel was consumed by passenger vehicles. However, Siam said passenger cars account for less than 1% and SUVs and taxis for 5% of the diesel consumed in India. An oil ministry official said this Rs.80,000 figure could be revised up to Rs.1 lakh.

“In recent times, it is seen that demand for petrol is anyway not there, but demand for diesel cars is also cooling off,” said Vishnu Mathur, director general of Siam. “Under these circumstances, any increase in duty will not promote petrol car sales, but will reduce the overall sales into negative territory, which will have an adverse impact on government finances as well as a negative impact on the entire supply chain.”

In the last fiscal year, sales of passenger cars expanded 2.19% to 2.02 million units. The Indian automobile market grew 12.24% to 17.4 million units.

“The right way of addressing the problem is to reduce the price differentiation between petrol and diesel, which has gone up from 25% in 2010 to 75% in 2012,” Mathur said.

“The industry is willing to accept a separate supply of diesel at a higher price for personal cars. But it is government’s responsibility to find a proper mechanism for that,” he added.

A proposal that was discussed at length by the industry as well as the government was to increase the price of diesel by Rs.2 and decrease the price of petrol by Rs.8, two industry officials present at the meeting said independently. Mint could not independently confirm this.

“By doing this, neither the government’s finance will be impacted, nor the industry will complain about the price distortion,” said one of the two industry official cited above.

The government had refrained from imposing higher excise on diesel vehicles in this year’s Union budget despite pressure to pare its rising subsidy bill. The government aims to limit its subsidy bill to 2% of its GDP in the current fiscal year from 2.4% in 2011-12.

Among those who attended Wednesday’s meeting were Maruti Suzuki India Ltd’s chief executive and managing director Shinzo Nakanishi, Tata Motors’s managing director P.M. Telang, Ford India’s Boneham, M&M’s president (automotive and farm equipment) Pawan Goenka, Mercedes-Benz India Pvt. Ltd’s director (corporate affairs and human resource) Suhas Kadlaskar and Hyundai Motor India Ltd’s director (marketing and sales) Arvind Saxena.

CBEC chairman S.K. Goel was also present at the meeting.