Home >Companies >Siam cautions against more duty on diesel cars

New Delhi: The Society of Indian Automobile Manufacturers (Siam) lobby group warned the finance ministry on Friday that any additional excise duty on diesel cars will push the industry into negative territory and thereby lower the government’s revenue.

The letter was in response to questions raised by the ministry at a meeting with the grouping and company chiefs held earlier this month to discuss a proposal to levy excise duty on diesel-run cars. Mint reported this on 6 June.

The subsidy on diesel has led to a distortion in car sales, with a larger proportion of buyers opting for vehicles run on the fuel to take advantage of a price differential that’s as much as 32.

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Mint’s Amrit Raj says, that auto industry body SIAM has requested the finance ministry to not levy any additional tax on diesel cars. Doing this would only push the auto sector into negative growth zone

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The subsidy, which is meant for farmers to help them run pump sets, also benefits those who drive luxury vehicles made by Mercedes-Benz, BMW and Audi while leading to a ballooning of the government’s subsidy bill.

Meanwhile, some groups have said the increased number of diesel-run cars could lead to health problems because of emissions from engines burning the fuel.

Petroleum minister Jaipal Reddy last week wrote to finance minister Pranab Mukherjee recommending a hike in excise duty on diesel cars ranging between 1.7 lakh and 2.55 lakh to help compensate oil companies for selling diesel at below market rates.

A duty increase on diesel cars is expected to make a further dent in sales at car companies, which are finding it difficult to attract customers amid rising fuel prices, high interest rates and slowing economic growth.

Indian car sales grew 2.19% to 2.02 million units in the last fiscal, while for the auto industry as a whole, sales grew 12.24% to 17.37 million vehicles.

“In such a scenario, any additional excise duty on diesel cars would further hit the overall car sales in the country and (is) likely to push the industry into negative territory, which would also have an adverse impact on government revenue," SIAM said in a letter to finance secretary R.S. Gujral. Mint has a copy of the letter.

The government was expected to take a decision on the issue ahead of the monsoon session of Parliament, that’s scheduled to start in July. However, on Friday, a finance ministry official said the government may require some more time to respond to the issue.

“The government will study the report and take a call on the potential gains of levying such a tax," said the ministry official, requesting anonymity. “But a final decision may take some time" because of the upcoming presidential poll. Mukherjee has been nominated as the presidential candidate of the ruling coalition.

Siam said sales of all type of cars—including diesel—have slowed in recent times and it won’t be right to assume that demand for petrol cars has entirely shifted to those run on the cheaper fuel.

“The overall capacity utilization for most players in the industry have significantly reduced," Siam said. “In many cases, diesel cars are also not selling and dealers have to incentivize their sales through discounts."

Siam said any further excise duty increase will increase distortions in the taxation structure and will act as a dampener for the entire industry, which has invested heavily in diesel technologies.

Ford India Pvt. Ltd president and managing director Michael Boneham said that long-term investment decisions are dependent on stable government policies.

Siam also said that a shift from diesel cars to petrol would impact the overall import bill for crude oil. Siam maintained that the government should focus on reducing the big gap between petrol and diesel fuel prices in order to bring down the subsidy bill.

Remya Nair contributed to this story.

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