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201212 Mar

union budget diesel tax


The Union Budget will be declared by the end of this week. Read on as we gaze into our crystal ball to try and reach some conclusions as to how the proposed changes to policy, duty structure, excise, fuel pricing and the deficit will impact the auto industry.


This Union Budget is particularly critical for India in many ways, as the Central government bats on a shaky wicket, while trying to maintain its political clout, and yet balance the need for growth and reduce the fiscal deficit. Political compulsions aside, let’s observe the main factors and their influence on the auto industry:


Primary among the debate is the proposed reduction of Fuel subsidies and the introduction of a ‘diesel tax’: Diesel, LPG and CNG and kerosene are heavily subsidised by the Central government. Petrol prices, however, are now subject to free market pricing. With diesel costing Rs 40 per litre on average, while petrol hovers around the Rs 70 mark, the scramble to buy diesel cars is obvious. The Kirit Parekh Committee on energy has made a recommendation that a ‘diesel tax’ be imposed on car buyers who seek to purchase a diesel car. This ‘diesel tax’ has been pegged at Rs 80,000 on the ex-factory price of the vehicle. However, the load on the car buyer will be more, since the increase in ex-factory price will translate to higher insurance costs, road tax and registration charges. The total price increase therefore would be in the region of Rs 1 lakh. This ‘diesel tax’ will be over and above the existing price difference between petrol and diesel variants of existing models.


To illustrate with an example, at present the ex-showroom price difference between a Ford Figo petrol and Figo diesel for the same trim level is about Rs 90,000.  In the case of the new Maruti Swift, the price difference is Rs 1.1 lakh, while for the Hyundai i20, the difference between petrol and diesel variants is Rs 1.2 lakh. Add the ‘diesel tax’ and the price difference doubles straight away.


The fall-out of this proposed increase in price will be that the demand for diesel cars, especially in the hatchback and mid-size sedan categories will slump. Presently, all car-makers have already invested huge sums of money to increase diesel car production, including their vendor supplies. Ford for example has already stated that production of the Figo is biased in favour of the diesel variants in the ratio of 70:30. If the proposed ‘diesel tax’ does come into effect, then all car-makers will be forced to scramble to re-align their production, which cannot happen overnight, even on flexible production lines.


The upswing to this is that dealers are being greeted with increased footfalls and demand for diesel cars, in anticipation of the upcoming Budget. Tata Motors officials have said that dealers are being encouraged to lift stocks as much as possible to cater to demand. The dealers too are finding increasing numbers of customers who are willing to compromise on colour and trim levels, just to get their hands on a diesel-powered vehicle.


pawan goenka mahindra and mahindra

Dr Pawan Goenka, President, Automotive and Farm Sector, M&M, is critical of the proposed 'diesel tax'.


Of course, not everyone is in favour of such a price increase. Dr Pawan Goenka, Head of M&M’s Automotive and Farm Sector, is critical of such a move. “Arguments are being made both pro and against, sometimes not based on data and facts, but more based on emotions.

Our plea to the finance ministry is whatever decision is made should be based on correct data and not based on some perceptions that we have about diesel vehicles and the benefit that will come out of diesel vehicle taxation. The primary point that we have made is that overall consumption of diesel fuel for private diesel vehicle use is less than 2%. That's proven without any doubt. Therefore, the whole argument that by doing so we are somehow taking care of the loss due to diesel fuel subsidy doesn't hold water.


“Second, the fact that diesel vehicle as it is more expensive because of technology puts further burden on diesel vehicles, which are vehicles that emit much lower CO2 emission. That's the argument that we have made. I think the argument is well understood. I think the argument is well accepted. What the final decision would be, we do not know, but we are hopeful that in the Budget we will not see a damaging hit on the diesel vehicles.”


Asked on what alternative would be viable to the proposed diesel tax, Dr Goenka added: “We are of the view that the government should raise diesel prices to market-based pricing, encourage replacement of petrol by diesel and there by save on oil import bill.”


Of course, things will become much clearer once the Union Budget is tabled in Parliament on March 16. Political considerations and pandering to the vote bank in terms of sops and subsidies will affect the outcome, however. For the middle-class car buyer, this period of uncertainty will mean that they will try and capitalise by buying a diesel car as soon as possible.

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