New Delhi: The Supreme Court on Friday lifted an eight-month-old ban on the registration of large vehicles fuelled by diesel in the national capital region (NCR) centred on Delhi, making it conditional on manufacturers paying a levy for polluting the city’s air.

Automobile makers would have to pay a levy equal to 1% of the ex-showroom price of diesel vehicles with an engine capacity above 2000cc, ruled a three-judge bench of the apex court.

“The deposit of the amount alone shall entitle manufacturers, dealers and purchasers to have the car registered in Delhi," said the bench comprising Chief Justice T.S. Thakur, and justices A.K. Sikri and R. Banumathi in its order, delivered on a petition by Mercedes-Benz India Pvt. Ltd.

The Supreme Court, on 16 December 2015, banned the registration of luxury automobiles and sport utility vehicles with an engine capacity in excess of 2000cc in NCR, responding to concerns over increasing air pollution in the national capital, blamed on emissions by diesel vehicles.

Delhi was ranked the world’s most polluted city in 2014 by the World Health Organization (WHO). This year, WHO ranked the quality of Delhi’s air the 11th most foul.

On Friday, the Supreme Court modified its December order after Mercedes-Benz, Toyota Kirloskar Motor Pvt. Ltd and lobby group Society for Indian Automobile Manufacturers (Siam) agreed to pay the green levy.

No one knows whether the so-called green cess will have any impact on diesel car sales, should the manufacturers pass on the cost to buyers.

“It is not a deterrent. This is very cosmetic," said Anumita Roychowdhury, executive director at the Centre for Science and Environment, an environmental activist organization.

She said an amicus curiae (friend of the court) had suggested that fuel tax charged on diesel should be on par with that for petrol. Petrol car owners now pay 10 per litre more than diesel car drivers do. “Additional tax has to be recovered from the diesel car user. If you want to recover the extra tax, you will have to increase the price (of diesel) by 20% to 30%. This is in the court and a decision on this will be taken on a later date," said Roychowdhury.

According to Maruti Suzuki India Ltd’s annual report, the share of diesel vehicles in industry sales declined from 48% in 2014-15 to 44% in 2015-16. According to Siam, in the three months to June, the share of diesel vehicles fell to 27% of total passenger vehicles sold in India.

At its peak in 2012-13, when the price difference between petrol and diesel had widened to more than 30 a litre, the share of diesel vehicles rose to 58%.

Interestingly, the amicus curiae also suggested that the court extend the green cess to all diesel passenger vehicles, even those below the 2000cc capacity. The court is yet to act on the suggestion, which could be a serious concern for the automobile industry.

“If cess is spread over to smaller engines, the nature of impact on smaller vehicles due to price increase will be severe as customers in the small car segment are price-sensitive," said an auto industry executive who declined to be named.

“It is easier for a customer to absorb the price increase if he is paying 25 lakh for a car than one who wants to buy a 5 lakh car," the executive explained.

The apex court will also consider the central government’s opposition to the levy of the green cess. The government has argued that the court does not have the authority to impose an environment compensation charge and that this is a legislative mandate.

Indeed, the right to levy a tax is a legislative one and can’t be done by the courts.

The environment protection charge has to be deposited monthly in a public sector bank. Registration officers will verify if the charge has been paid by the manufacturer/dealer based on a receipt.

“The deposit has to be before the registration," the court observed orally.

The ban on large diesel vehicles has affected firms such as Mercedes-Benz, Mahindra and Mahindra Ltd, Tata Motors Ltd and Toyota Kirloskar Motor which make such automobiles.

According to rating agency Icra, 30% of the utility vehicle segment had been affected by the ban. In addition, 50-60% of the luxury car market in India, which is 35,000 units per annum, was also hurt by the ban.

With the Delhi-NCR market contributing almost 10% of overall passenger vehicle sales in India and an even bigger proportion of the luxury car segment, the Supreme Court’s decision has come as a relief for automobile manufacturers and their dealers, who have experienced a significant sales dent since December.

“We are very relieved with the decision of the Honourable Supreme Court today. Hope this decision will put all controversy surrounding diesel fuel behind us and we will be able to focus on the more important task of making our vehicles compliant with BS-VI norms by April 2020," Pawan Goenka, executive director of Mahindra and Mahindra, said in a statement.

The government said in January that India will move to the toughest emission standards of BS-VI from the current BS-IV by 2020, skipping an intermediate level.

The auto industry and environmentalists have been engaged in a tug of war over the merits and demerits of diesel vehicles in recent months. The issue forced some auto makers such as Toyota to take extreme steps. Toyota, the world’s largest carmaker, will halt new investments in India until there is clarity on the fate of diesel-powered vehicles in the country, Mint reported on 6 April.

Mercedes-Benz said on Friday that it had voluntarily offered to pay the green cess, but not on the premise that its vehicles were polluting the environment.

“We reiterate that, being the pioneers of numerous technological innovations, Mercedes-Benz has the technology available and can switch our entire fleet to BS-VI by 2018, however, we need compatible fuel to do so, to provide our customers with the latest technologies which are available worldwide," the company said in a statement.

“We think the introduction of BS-VI fuel is the best viable option to curb pollution," it added.

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