Mumbai, June 8: The outcry by auto makers against the move to slap an additional one-time tax on diesel cars has prompted researchers to rig up strong economic arguments why the contentious proposal should be dumped.
On Friday, the government itself appeared to be riven on the issue with the secretary in the heavy industry department saying he would write to the finance ministry next week advising against the imposition of the levy.
"We will again press for not levying the taxes. We will submit a report to the finance ministry on Monday opposing the additional levy on diesel vehicles," Ambuj Sharma, joint secretary in the department of heavy industry, told reporters in the capital.
At the same time, Crisil Research ' an independent economic think-tank ' came out with a study that questioned the economic rationale behind such a levy since it would fail to put a lid on rising petroleum subsidies.
The Crisil study estimates the number of diesel cars and utility vehicles (UVs) on Indian roads at 3.6 million, or about 23 per cent of the total population of cars and UVs in the country.
The study says since the one-time tax will be levied on only new vehicles sold, the government cannot hope to garner more than Rs 6,000 crore annually.
Crisil estimates this will only cover 12-15 per cent of the total diesel subsidy bill. It goes on to argue that the government will need to raise diesel prices by 10-15 per cent if it wants to cap under-recoveries on diesel at last year's level of Rs 9 per litre.
At current prices, the under-recovery on diesel is estimated at Rs 14 a litre.
The Centre has been mulling an additional tax on diesel cars as it feels that this will curb the growing consumption of the fuel and, thereby, bring down the subsidy bill.
While diesel vehicles account for around 40 per cent of the new cars sold in the country, auto firms aver that diesel cars only account for less than 7 per cent of the fuel consumed in the country.
"Diesel cars and UVs account for just over a tenth of the diesel consumption. To bring about a sustainable reduction in the subsidy burden, the government will have to hike diesel prices, and ensure that in future also, diesel prices move in accordance with crude oil prices," the Crisil study said.
Crisil Research said collections from a one-time tax (estimated at between Rs 90,000 and Rs 140,000 per car depending on fuel and vehicle use) on all new diesel cars and UVs sold would almost equal the subsidy borne by the government over the life of the vehicle. This tax would form 16 to 20 per cent of a typical diesel car's price.
On the other hand, an annual use-based tax on all diesel cars and UVs will amount to an additional 2 per cent of the vehicle price annually for personal-use cars and 5 per cent for commercial-use cars. However, there could be practical difficulties in collecting an annual tax.
The government will then have to rely on RTOs (regional transport offices), which are fragmented and not so well-equipped. Thus, it will be difficult to collect taxes regularly and monitor non-payments, which renders this option unviable.