Home/ Auto News / Green tax may drive up CNG car sales

Maruti Suzuki India Ltd is set to gain the most from a government proposal to levy a green tax on petrol and diesel vehicles, according to two auto industry executives.

India’s top carmaker has the largest portfolio of compressed natural gas (CNG) vehicles among domestic automakers. The Suzuki Motor Corp. unit also has aggressive plans to push its CNG vehicle sales to 200,000 units or more a year by 2022.

Maruti sold a record 106,443 CNG vehicles in FY20. According to the company, sales of such vehicles have grown at an annualized average of 15.5% over five years through FY20.

Maruti has been pushing CNG vehicles as an eco-friendly option when compared with diesel. From the start of this fiscal, the company stopped selling diesel vehicles and has ambitious plans to expand its portfolio of CNG models to compensate for the loss. South Korea’s Hyundai also sells CNG vehicles, but its volumes are limited compared to its Japanese competitor.

Road transport and highways minister Nitin Gadkari last Monday announced a proposal to impose a green tax on a certain category of vehicles from 1 April 2022. As per the proposal, a green tax could be levied on personal vehicles at the time of renewal of registration certificate after 15 years equivalent to 10-25% of the road tax of a petrol or diesel vehicle depending on the fuel. A similar tax could be levied on transport or commercial vehicles older than eight years at the time of renewal of fitness certificate.

Hybrid vehicles, electric vehicles and those running on cleaner alternative fuels such as CNG, ethanol and liquefied petroleum gas (LPG) will be exempted. Higher taxes on petrol or diesel vehicles may see more customers, especially those of small cars and compact sedans used by India’s large middle-class households, shift to CNG, benefiting companies such as Maruti and Hyundai, the industry executives said.

Also, companies and dealers may use the green cess and increased purchase cost as a marketing strategy to induce customers to buy CNG vehicles, the executives said.

The government proposal will also likely boost the resale value of CNG vehicles. Though most passenger cars are generally not used beyond 15 years in cities, this announcement will impact customer psyche going forward, said Avik Chattopadhyay, founder, Expereal, a brand consulting firm.

“Maruti is likely to be the biggest beneficiary as its dealers will push CNG vehicles by pointing to the green tax, which is likely to enhance the resale value of the vehicle compared to petrol and diesel. Maruti also has the largest fleet of CNG vehicles compared to other carmakers," Chattopadhyay said.

The government’s plan also comes at a time when prices of petrol and diesel have soared to record highs, which may also help accelerate the shift to CNG. The government has also been urging carmakers to introduce more CNG vehicles to reduce vehicular emission in major cities. Inadequate refuelling stations though has been an impediment in driving up sales of CNG vehicles.

According to one of the executives cited above, the proposal, if made a law, may heavily impact sales of diesel vehicles in segments such as entry-level utility vehicles and compact sedans as CNG costs much less than petrol or diesel and the resale value of CNG vehicles may rise.

“In the used-car market, the value of CNG cars will definitely get a boost from this proposed cess. Customers in the compact sedan segment might now consider CNG as a better option as the government has made its intention clear of not supporting diesel and petrol in the long run," the industry executive said seeking anonymity.

Some analysts though said the higher road tax may not significantly alter customer preference as there are limited passenger vehicles that are older than 15 years.

“We believe road tax, which typically ranges between 10% and 14% of the vehicle cost, will lead to a 1-3.5% additional cost on vehicles older than eight years, which is significant. However, given the shorter time frame of only eight years, we believe freight operators will prefer to pass on costs, and this will raise the cost of operations. For passenger vehicles, too, the impact would be limited as vehicles older than 15 years will be much lower, we estimate," Kapil Singh and Siddhartha Bera, research analysts at Nomura, said in a note.

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Updated: 01 Feb 2021, 05:14 AM IST
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