Debate over taxing diesel cars more is over

The automobile sector has been battling a rise in taxation since the last year, which has already run it aground. The industry grew just 4.5% in the first nine months of this fiscal, the lowest in four years.

The gap between petrol and diesel prices is widening since the government freed petrol from the administered price mechanism, leading to an rising dieselisation of the passenger vehicle industry.

Seeking to pin down the undue beneficiaries of diesel subsidies, various lobby groups, expert committees and even certain ministries want to curb the increased diesel consumption by vehicle owners who drive sports utility vehicles that are increasingly downsizing both in terms of size and price.
Fortunately, the finance minister has done nothing more than lending them an ear.

In the last Budget, the automobile sector had to gulp down the bitter medicine of increased excise duty, higher customs duties and change of specific duties in case of commercial vehicles and large cars to ad-valorem rates.

Consequently, the excise levies reverted back to the pre-2008 recession levels. In case of large cars the levies are at just a shade below fiscal 2003 levels at 29%.

With investment plans of Rs27,000-30,000 crore drawn up by various automobile manufacturers for the next five years, the industry really needs is fiscal support to facilitate these investments, which would also help the government to revive the flagging industrial production.

The RBI has done its bit in reversing interest rate tightening cycle. It is up to the government to take the cue now. The automobile industry has in the past responded with vigour to tax reductions.

When the excise duty on cars was lowered from 32% to 24% (+1% National Contingency and Calamity Duty) in 2002, the five years following that saw the industry volumes pace at an annual rate of 14.1% right up to fiscal 2007 and the investments by the industry amounted to almost `18,000 crore.

However, the global recession meant that the industry paced only 11.4% annual growth rate in the five years thereafter. During the intervening years, the government did offer a fiscal package dropping the excise duty to a low of 8% (except for large cars) to help the industry cope with the recession but now they are back to the pre-recession levels.

From the upcoming Budget one can hope that diesel cars may not get taxed any higher than they currently are. After all, on every diesel car that gets sold instead of a petrol car the government gets an additional excise of Rs10,000-12,000 per such car as a diesel car is priced an average Rs1-1.25 lakh extra.

Besides large cars and SUVs are already excised at a rate that is more than double that of small cars. Since the government has already decided to raise prices of diesel by 50 paise per month so as to remove the subsidy over the next 18 months the debate on undue beneficiaries evaporates.

It’s been ten years since the government has been levying the National Contingency and Calamity Duty of 1% specifically on cars, two-wheelers and cigarettes.

This has also been a cause of litigation for two-wheeler companies which put investments in Uttaranchal assuming this levy was not applicable in contrast to the stance by the tax authorities who enforced the levy. We can expect the government to remove NCCD in this Budget altogether.

With the widening of service tax base, many services by the automobile industry related to both manufacturing and after-sales activities have been steadily brought under the service tax ambit.

However, taxes on indirect outsourced manufacturing (like body fabrication), vehicle transport (distribution) services, annual maintenance contracts and even warranty and first year vehicle services are not reimbursable to manufacturers as part of Cenvat credit.

The finance minister may permit this credit, subject to abatement conditions. The industry has also been demanding a similar credit on services related to capacity expansions. However, the Budget may not yield to this specific demand.

The writer is senior vice-president - equity research, Fortune Equity
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