Should diesel cars be taxed?


Executive Director, Research and Advocacy, Centre for Science and Environment*

“The additional taxes on diesel cars can generate resources to produce clean diesel for all segments to meet public health objectives”

There is a new number game in town. To stave off the pressure to put high tax on diesel cars, the automobile industry is desperate to prove that cars use less than one per cent of the country’s diesel. It is out to kill any proposal to equalise the fuel tax burden on all cars — petrol and diesel. This number jugglery diverts attention from the enormous revenue and under-recovery losses from under-priced and under-taxed fuel used in cars.

With each litre of petrol replaced by diesel to run a car, the excise earnings drop seven times. These losses will compound with the increased share of diesel cars and sports utility vehicles (SUVs). The effect is so dramatic that the excise earnings from both diesel and petrol has nearly equalled. Petroleum Planning and Analysis Cell says the diesel consumption growth rate has outstripped that of petrol.

Industry’s clever ploy is to contrast diesel use in cars with other sectors of the economy. This hides the massive dieselisation of the car segment. Industry’s own estimates confirm that diesel is already 40 per cent of the total fuel used in the car and SUV segments. Diesel cars now account for over 40 per cent of total sales from four per cent in 2000; in popular models diesel car sales account for 50 per cent to 75 per cent. Despite the recession, diesel-car sales have jumped 34 per cent in 2010-11.

Diesel’s lure adds to revenue losses. Only from the diesel used by the new diesel cars sold in 2010-11, the Centre is estimated to have lost Rs 800 crore in fuel excise. From the on-road fleet the loss is staggering, close to Rs 3,000 crore. This loss will compound with high annual sales. Losses from other central and state taxes are not even accounted for.

At stake in this diesel gamble is our health. The media is already abuzz with spiralling cancer risks in Indian cities. Policies must reduce environmental risk factors that include toxic diesel emissions. The World Health Organisation, International Agency for Cancer Research, California Air Resources Board and US Environmental Protection Agency have branded diesel particulates as human carcinogens and implicated them for lung cancer that is also rising in our cities.

Diesel cars also have the legal license to emit more particulate matter and nitrogen oxides that are of special concern in cities. Other governments consider these risks before taking a decision. Should our policies trade ill-health for profits?

The car industry defends itself saying diesel cars are increasing in Europe. Mercedes Benz has lobbied against disincentive for diesel cars. But they hide the fact that Europe has moved to more advanced technologies and clean diesel with 10 ppm sulphur. Indian diesel is heavy with 350 ppm sulphur (50 ppm in few cities). India needs clean diesel too, not just for cars but also for its captive users, buses and trucks. But the auto industry has not been given any further target for improving emissions levels.

The additional taxes on diesel cars can generate resources to produce clean diesel for all segments to meet public health objectives.

Cheap diesel is also pushing the market towards bigger cars and SUVs that guzzle more fuel, and undermines fuel-efficiency advantages of small cars. High petrol prices have kept the bulk of the petrol car sales – as much as 87 per cent – below 1200 cc engine. But more than 40 per cent of diesel cars are above 1500 cc. Last year, the SUV segment registered a 41 per cent growth rate. This trend will explode.

Instead of playing this fallacious game of how little diesel cars use compared to power plants and industry, our government has to come clean on actual losses on account of use of diesel in cars vis-a-vis petrol cars and two-wheelers. And slap additional tax on diesel cars to equalise the tax burden for all personal vehicle usage and reduce public health risk.

Other governments have acted. Brazil has banned diesel cars as it taxes diesel low. In Denmark, diesel cars are taxed higher to offset the lower prices of the fuel. In China, taxes do not differentiate between petrol and diesel, while Sri Lanka uses taxation to discourage diesel cars and has reversed the dieselisation trend and diesel fuel consumption in its transport sector. The message is clear; profits must not get priority over our health.

Member of the Board & Director, Volkswagen Passenger Cars

“Imposing an additional tax on diesel cars will have negative effects on sales. This will act as a deterrent in the development of diesel technology”

With the increase in petrol prices in 2011, the automotive industry has witnessed a massive shift within the rising gap between petrol and diesel prices. Especially after the government deregulated the price of petrol while maintaining the subsidy on diesel, the market has seen a spurt in demand for diesel cars. Diesel cars, which contributed to about 23 per cent of the overall car market a few years ago, now command close to a 52 per cent share.

Diesel technology has evolved over the years and we have witnessed an outstanding improvement in the efficiency of engines. Carbon emissions by diesel vehicles have been curtailed significantly and are well below the stipulated limits according to Indian standards, while NVH (Noise, Vibration and Harshness) levels have substantially improved.

Hybrids currently enjoy frontrunner status among environmentally-conscious car buyers. But a recent study conducted by the RAND Corporation USA suggests that state-of-the-art diesel technology has shown advancements over hybrids and ethanol vehicles, both for the consumer and for the environment. When factors like the cost of making and transporting fuels, cost to the consumer and various other impacts including that on energy security are considered, diesel fuel stacks up well against other green alternatives currently on offer.

It has been widely proven, over the course of a vehicle’s lifetime that advanced diesel technology translates to greater savings. The RAND study also gives clean diesel engines a slight nod over hybrids from a social point of view. After factoring in the cost of hybrid technology vis-a-vis the increased performance of diesel engines, diesel technology holds a cost-effective advantage.

Most top-end vehicles and luxury vehicles today are developed on diesel platforms because of the power and efficiency they impart to the car. Diesel has also been established as a cleaner and better fuel alternative compared to petrol. Excellent reliability and durability of the engines are one of the main reasons diesel engines are widely used in commercial applications.

2012 has shown signs of revival and stabilisation that are very positive for the automotive industry. All auto companies are looking at developing diesel technology for their cars — but this is not to only reap the benefits given the current scenario but for a more balanced bouquet of offerings.

Customers across segments want to pay less for maintenance but still want more powerful vehicles in return for their hard-earned money. Imposing an additional tax on diesel cars will have negative effects on sales. This will act as a deterrent in the development of diesel technology. Besides, diesel cars already cost more than those that run on petrol — whether they fall in the sub-1,400cc category or above it.

A levy on diesel cars will only reduce future subsidies by shifting demand to petrol cars. The bulk of diesel usage goes towards commercial vehicles, diesel power generating sets and agricultural pump-sets, so imposing taxes on diesel cars and consequently raising diesel car prices may reduce diesel usage, but not much. The fundamental problem will remain.

Diesel is more fuel-efficient than petrol — usually 10-30 per cent, depending on where and how the car is driven. And since diesel consumption depends on the total number of diesel cars on the roads – those bought over the last 15 years, and not just the incremental cars sold this year – the actual petrol-diesel consumption ratio will be far below 20-25 per cent.

It is the government’s diesel subsidy policy that has driven car manufacturers to opt for their respective dieselisation programmes. The logical way to proceed is by raising diesel prices marginally. Yes, this may have negative fallout that will be seen on commercial vehicles – trucks, buses, light commercial vehicles – but this can be compensated by introducing lower taxes on new vehicles and on parts and components.

It makes more sense for the government to move to a market-linked pricing policy for diesel instead of simply taxing diesel cars. The way ahead for the industry should be to develop better technologies by incentivising research and development not only on diesel engines but across all sorts of fuels. The objective should be to continue to make vehicles more economical, fuel-efficient and eco-friendly for Indian roads.