New Delhi: A day after the Central Board of Excise and Customs (CBEC) said finance minister Pranab Mukherjee was considering an increase in excise duty on diesel cars, a consensus seems to be building within the government, with the oil ministry supporting the move.
Following this, key stakeholders involved in taking a decision on increasing excise duty on diesel vehicles are likely to meet on Wednesday, according to three people, including a top government official, with direct knowledge of the matter. The move is aimed at negating the price advantage that diesel cars enjoy because of the subsidy on the fuel.
Among those attending will be representatives of the department of heavy industries, the oil ministry, the ministry of finance and the Society of Indian Automobile Manufacturers (Siam). Also attending will be chief executives of automobile companies or their representatives.
Maruti Suzuki India Ltd chief executive and managing director Shinzo Nakanishi, Tata Motors Ltd managing director P.M. Telang, Ford India Pvt. Ltd managing director Michael Boneham, and Pawan Goenka, president (automotive and farm equipment) at Mahindra and Mahindra Ltd (M&M), are among those likely to attend the meeting. The meeting is likely to be chaired by finance secretary R.S. Gujral.
Last month, minister of state for finance S.S. Palanimanickam said in a written reply to Rajya Sabha that a proposal had been received from the oil ministry for the levy of additional excise duty on diesel cars along with its suggestions for budget 2012-13.
“A high-level meeting has been called to discuss the issue of levying extra excise on diesel cars. The ministry of finance will chair the meeting and will seek responses of key stakeholders on the issue,” said a top government official, requesting anonymity.
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 4m in length but have smaller engines, while it’s 12% on smaller cars.
A top auto industry official confirmed that the firms have been invited to attend the meeting. “The companies that have (a) larger diesel portfolio will be attending the meeting,” said this official. Companies such as Tata Motors and M&M have more than 90% of their sales coming from diesel-run cars.
The segment is a critical one for Maruti Suzuki, India’s largest car maker, as well. About 90% of sales in 2011-12 for five of its models—the Ritz, the Swift, the Swift DZire, the Ertiga and the SX4—were of the diesel versions.
The finance ministry’s decision to hold the meeting came a day after CBEC chairman S.K. Goel said Mukherjee was examining the proposal to increase the duty on diesel, and that an appropriate decision will be taken in due course.
Despite rising global crude prices, the Congress party-led United Progressive Alliance government hasn’t raised diesel prices since July last year under political pressure from allies and opposition alike. This has forced the government to look at other options that would offset the fuel price advantage enjoyed by owners of diesel-run cars.
In fiscal 2011-12, state-run oil refiners lost Rs 80,000 crore because of selling diesel below cost price.
A senior oil ministry official, speaking on condition of anonymity, said the ministry is of the view that the recommendations made by a panel set up in 2010 under former Planning Commission member Kirit Parikh should be implemented “to stop the dieselization of the auto sector”.
“The difference between diesel and petrol is more than Rs 30. Something that (the) ministry was uncomfortable with, considering the fact that the diesel was subsidized fuel and that its overuse is hurting the economy,” said the oil ministry official.
In 2010, the Parikh panel had 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 sport utility vehicles and taxis for 5% of the diesel consumed in India. The oil ministry official said this Rs 80,000 figure could be revised up to Rs 1 lakh.
Siam maintains that raising excise duty on diesel cars is not a permanent solution and that the government should consider deregulating its price.
The price differential, which has widened after the steep hike in petrol prices in May, has led to the proportion of diesel cars rising as the cheaper fuel makes up for the higher cost of the cars. Owners of diesel-powered luxury cars made by Mercedes-Benz India Pvt. Ltd, BMW India Pvt. Ltd and Audi India Pvt. Ltd, among others, are also beneficiaries of a subsidy aimed primarily at farmers to allow them to run irrigation pumps and tractors.
The government had refrained from imposing higher excise on diesel vehicles in the budget despite pressure to curb its rising subsidy bill. The government aims to limit its subsidy bill to 2% of gross domestic product in the current fiscal year from 2.4% in 2011-12.
The government loses potential tax on every new diesel car sold. It had toyed with the idea of differential pricing of diesel for passenger cars, commercial vehicles and for other uses, but dropped that plan as it feared such a dispensation would be misused.
The price difference has distorted the market and resulted in an unnaturally high demand for diesel cars, according to Siam.
In the last fiscal year, sales of passenger cars in the world’s second fastest growing automobile market expanded 2.19% to 2.02 million units. The Indian automobile market grew 12.24% to 17.4 million units.