3 min read.Updated: 23 Nov 2021, 05:46 AM ISTLivemint
It’s time to abandon a policy of differential taxation based on car length that has distorted our market and cramped competitiveness. Let’s try variable rates instead for road pricing
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Skoda Auto Volkswagen India’s managing director Gurpratap Boparai recently pointed out how Indian tax policy might have held the country back from becoming a global hub for automobile exports. Among other factors, differential taxes have tilted our assembly base towards small cars—of 4 metres length or less—and away from larger vehicles that make up the bulk of foreign markets but are taxed so heavily here that they sell in low numbers locally, often denying carmakers the economies of scale they need to gain an edge on their cost of production. This distortion is enlarged by the large chunk of a car’s on-road price that is claimed by a variety of taxes in India. Consider GST, our principal levy. It is levied at 28%, the top slab, with an add-on cess of 1% on small cars and 17-22% extra on those longer than 4 metres. That the latter should pay indirect tax rates of at least 45% was once justified on the argument of these being ‘luxury’ purchases, but the typically large size of Indian families and rapid growth of cab fleets have made this point indefensible. A random survey of large-car passengers would reveal a sizeable share of those who do not deserve to be so overtaxed, directly or otherwise. Not only should our car market’s artificial division by vehicle size be erased, overall taxes on vehicles need to decline, perhaps as part of a broad reformist thrust for GST-rate convergence.
This need not mean we abandon the use of taxes as a tool. Tax policy is an aid in the promotion of exhaust-free electric vehicles (EVs), for example, which attract a GST rate of just 5%. We need fossil-fuel users to switch over to EVs and light taxes can hasten this transition. Some observers fear that a drop in car levies overall will make it harder for EV-makers to reduce prices enough to compete with petrol-guzzlers in attracting value-conscious buyers, which is a must for EVs to succeed. What this worry misses, however, is the fact that ‘Made in India’ EVs would have a reasonably good chance at global success only if manufacturers are driven to crush costs and innovate by the competitive intensity of a home market that does not overtax petrol or diesel options. Excessive protection from fossil-fuel vehicles will not help EVs get globally competitive. A lower burden of tax on all cars, in contrast, will let actual costs of production shape patterns of sales far more closely and push all carmakers to work harder on all cost-heads under their control. Over time, a few models could then achieve the global scale required for big export volumes, even as supply clusters cheapen car components and join overseas networks.
India’s passenger car market has floundered in recent years. After dropping from its peak of nearly 3.4 million units in 2018-19 to under 2.8 million in 2019-20, it slid further to just above 2.7 million last year. A chip shortage has curtailed output this year, but it was not likely to regain peak levels anyway. While a benign GST regime that makes no size distinction would be of help, it may also be time to explore the idea of road pricing for arterial routes in big cities to decongest traffic. Satellite-linked technology can enable a system that deploys differential rates to good effect. If we charge cars for their use of thoroughfares, EVs could be given a free ride to start with, for instance. Charges could generally vary by traffic density, with vehicles in a hurry billed extra for the use of a speedy express lane. Scaled up, it might even be able to make up for revenues forgone on tax relief.