Budget 2012: Mixed signals

THE UNION BUDGET of 2012-13 has sent out mixed signals. It has taxed the big cars and SUVs and offered more tax palliative to hybrid vehicles. The overall increase in taxes on cars, especially bigger cars, is welcome as it is needed to cut fuel guzzling and emissions. However, the much-awaited reform to tax the diesel car high to stop misuse of underpriced and under-taxed diesel for luxury use in cars has not been considered. It is ironical that while the Budget speech has emphasised on the urgency to reduce the subsidy bill to two percent of GDP in three years, it fails to restrain use of subsidised diesel in personal cars.

Hybrids continue to win. Specified parts for hybrid vehicles already enjoy full exemption from basic customs duty and special CVD with concessional excise duty / CVD of six percent. This has now been extended to specified additional items and lithium ion batteries imported for the manufacture of battery packs for supply to electric or hybrid vehicle manufacturers. This should help the emerging technology of hybrids to get a foothold in the market.

Overall, the taxes on cars have increased and more so for bigger cars. This is needed to stem the market shift towards bigger cars and SUVs.

It is, however, extremely disappointing that the proposal to tax the diesel car higher to control dieselisation has been ignored despite strong recommendations from the petroleum ministry and the official committees. This will have serious consequences, not only in terms of compounding the revenue and under-recovery losses of the government and the oil companies but also in increasing the public health costs.

Diesel cars are already selling more than the petrol cars. The sale of diesel models in popular segments is as high as 50-75 percent. Despite the recession, diesel car sales overall have jumped 34 percent in 2010-11. As the fuel prices remain distorted, increase in both capital and operational costs of petrol cars is adding to the lure of diesel cars. In fact, petrol cars have begun to record negative growth. Cheap diesel is also pushing the market towards bigger cars and SUVs that guzzle more fuels. High petrol prices have kept the bulk of the petrol car sales – as much as 87 percent – below 1200cc engine size. But more than 40 percent of diesel cars are above 1500cc. This trend will now explode.

Meanwhile, car majors have come forth to announce that they are committed to expanding diesel facilities. Clearly, the official policy by design is letting the car industry ride high on the perverse diesel subsidy and support car mobility for the rich.

With each litre of diesel replaced with petrol, excise revenue drops seven times. Losses from other central and state taxes are not even accounted for. At every stage of price build-up – pre-tax adjustments, dealer commission, state taxes – the fuel price gap gapes wider. But pollution and congestion in our cities cannot tolerate subsidy to personal cars. This inaction on diesel cars will add to our health budget. The WHO, International Agency for Cancer Research, California Air Resources Board and US Environmental Protection Agency have branded diesel particulates as human carcinogens and implicated them for lung cancer that is also rising in our cities.

Other governments have followed tax measures to control use of under-taxed and intermediate level of diesel technology and fuels. Brazil has banned diesel cars as it taxes diesel low. In Denmark, diesel cars are taxed higher to offset the lower prices of the fuel.

In China, taxes do not differentiate between petrol and diesel, while Sri Lanka uses taxation to discourage diesel cars and has reversed the dieselisation trend.

India needs urgent fiscal measures not only to stop dieselisation of the car segment but also to enable introduction of clean diesel with 10ppm sulphur level that allows use of advanced emissions control system to cut toxic diesel emissions. The additional revenue from diesel cars can help to meet the refinery costs of producing clean diesel especially needed for the captive users like bus and trucks.

The writing on the wall is clear. The tax hike on big cars and tax support for cleaner hybrids is welcome but the impact of these initiatives can get negated if toxic diesel emissions increase in our polluted cities.

"India needs urgent fiscal measures not only to stop dieselisation of the car segment but also to enable introduction of clean diesel with 10ppm sulphur level that allows use of advanced emissions control system to cut toxic diesel emissions."