Why hiking taxes on diesel cars is not the best solution

The Supreme Court has suggested that diesel cars be taxed at the rate of 25% at the time of buying the vehicle. In addition the court has asked for levy of 2% of the cost of a petrol car and 4% on a diesel car as an annual levy or a green tax to be charged along with insurance premium.


What this means if you buy a diesel car at Rs. 10 lakh, ex-showroom, you are going to pay another Rs. 2.5 lakh as diesel tax, in addition to road tax, insurance and other charges, which will finally take the car’s price up to Rs. 14 lakh on a Rs. 10 lakh car. The 25% figure has apparently been arrived at keeping in mind a 10-year ownership and 18,000 km per year running on average – saying this would be the extent of benefit of the subsidy on diesel enjoyed.

In addition, your car’s annual insurance premium will go up. If the premium amount on a Rs. 5 lakh car is Rs. 20,000, the addition of this green tax of 2% for a petrol car and 4% for a diesel car would add Rs. 10,000 to the insurance premium for the first year for a petrol and Rs. 20,000 (making that Rs. 40,000) on a diesel car.

The whole reason why this proposal has been made is because of the differential in fuel prices. Diesel retails at about Rs. 48 per litre in Delhi, while petrol is at Rs. 67 per litre, a difference of Rs. 19. Globally petrol and diesel prices are at a par (and in India, even premium diesel is now deregulated, selling at Rs. 66- Rs. 68 per litre). The government loses Rs. 41,100 crore this year or 0.7% of GDP because of the subsidy on diesel and has projected this could go up to Rs. 100,000 crore next year if something is not done to stem the consumption of diesel.

Diesel is used by public transport, generators, factories, railways and other industrial applications in addition to passenger cars and SUVs. Passenger cars and SUVs account for just 15% of the consumption of diesel according to the Oil Ministry.

Here’s why this proposal is seen as unfair.

This is a kind of advance tax

It is clear that if India wants to reduce its fiscal burden, it has to remove subsidies on fuel. Charging a 25% one time tax on the price of a diesel car is not the best way. To the car buyer this is a kind of advance tax he is paying on the car to enjoy the benefit of cheaper fuel. However, with fuel subsidies set to go in about two-three years’ time, and fuel prices becoming equal, the diesel vehicle buyer would have ended up paying substantially more than a petrol car buyer. When fuel prices become equal, would this amount be reimbursed in any form?

Diesel is more fuel efficient

Globally it is accepted that diesel is a cleaner fuel that petrol. In fact, Europe encourages the use of diesel as a fuel more than petrol, as it sees it as a greener fuel. Yes, diesel has its downsides, such as higher particulate matter and higher Nitrous Oxide levels, but if you look at fuel efficiency, a diesel engine is nearly 25% more fuel efficient than that of a petrol engine, thereby using that much less fuel and hence polluting that much less. If this move discourages buying of diesel vehicles, people will shift to petrol vehicles, consuming more fuel and polluting more.


Diesel and petrol emissions per kilometer

Petrol engine (1.2 L) Diesel engine (1.2L)
Carbon monoxide (CO) 42 units 2 units
Carbon dioxide (CO2) 100 units 85 units
Hydrocarbons (HC) 19 units 3 units
Nitrous oxides (NOx) 23 units 31 units
Particulate matter (ppm) Trace 100 units
Fuel Efficiency 15 kmpl 19 kmpl

Source: Automobile Association, Industry Data


Even if fuel prices were made equal, diesel would be a preferred choice simply for the fuel efficiency that a diesel engine offers. Also read: Diesel or petrol – which is more environment friendly?

Fuel use may not shift, car segments will

Given this new proposal to tax diesel vehicles, a buyer who was looking at a Rs. 10 lakh diesel vehicle, with an on-road price of Rs. 12 lakh, will now choose a Rs. 8 lakh diesel vehicle whose on-road price will come close to what he had planned. So instead of say a buyer picking a Toyota Innova for his use, he may compromise and buy a Maruti Ertiga, just so that his purchase cost is the same, but he will still avail of the benefits of a diesel engine and lower fuel prices.

Only 15% to try to bridge the gap

Given that only 15% of diesel consumption is by cars and SUVs, the amount collected by way of a 25% hike won’t offset the subsidy burden by much. Annually about 18 lakh passenger cars are sold in India. Of these only about 30% are diesel, given that most are small cars and diesel engines start from cars priced Rs. 5 lakh onward. That’s about 5.4 lakh diesel vehicles at an average price of Rs. 6 lakh each. A 25% tax hike on that would take the average cost to Rs. 7.5 lakh (a Rs. 1.5 lakh increase per car). This would net the government an additional revenue of Rs. 8,100 crore. Given that the projected subsidy burden is Rs. 100,000 crore, this is less than 10% of the subsidy burden being met.

If you take it at the present subsidy, it would amount to about 20% of it being covered by just 15% of the diesel users.

Is that fair? Share your views on this tax proposal.