The proposal may force cos to shelve investment plans, warns Praful Patel

A debate has started within the government over Petroleum and Natural Gas Minister S. Jaipal Reddy's proposal seeking additional excise duty on diesel cars to check misuse of subsidy on diesel by car owners even as the Department of Heavy Industry has warned that such a move could further hurt the car industry, which has seen consistent fall in its sales since last year.

Expressing concern over the misuse of subsidy on diesel by car owners, Mr. Reddy has written to Finance Minister Pranab Mukherjee, seeking a steep increase in excise duty on diesel cars. The Minister has sought Rs.1.70-lakh additional duty on small diesel cars and Rs.2.55 lakh on medium and large cars. In the letter, he has highlighted how the huge difference of Rs.30.25 a litre between the price of petrol and diesel had led to an abnormal growth of diesel car sales and objected to the rich getting subsidised diesel.

Mr. Reddy has also stressed the need on putting additional duty on diesel cars to discourage dieselization of economy that would bring additional revenue, which could be used to meet oil marketing companies' (OMCs) under-recoveries. Notably, around 15 per cent of total diesel sold is consumed by car users. Significantly, in February, 2010, the Kirit Parikh Committee had recommended an additional excise duty of Rs.80,000.

Pointing out that due to the price differential, diesel consumption went up by 7.2 per cent in 2011-12 compared to 6.2 per cent growth in 2010-11, Mr. Reddy said in comparison, the growth in petrol sales declined from 10.7 per cent in 2010-11 to 5.6 per cent in 2011-12. Such a sharp increase in consumption of diesel as compared to petrol over the last one year was due to the large subsidy on diesel. The subsidy on diesel alone is expected to increase from Rs.81,192 crore in 2011-12 to over Rs.1 lakh crore in 2012-13 at current prices.

Meanwhile, the Department of Heavy Industry has approached the Finance Ministry, warning that any additional tax on diesel vehicles would hurt the auto industry and might force Indian as well as foreign auto companies to shelve their investment plans.

Minister of Heavy Industries and Public Enterprises Praful Patel has already taken up the matter with Mr. Mukherjee. At present, excise duties on passenger cars range between 12 per cent and 27 per cent with a fixed duty of Rs.15,000, depending on the engine size and length of the vehicle.

High interest rates and an overall gloomy economic scenario have seen car sales falling in the past few months. Notably, growth in car sales in May was at the slowest pace in seven months, a mere 2.78 per cent. “This is the slowest growth since October last when car sales witnessed a decline of 23.77 per cent,” Society of Indian Automobile Manufacturers (SIAM) Director-General Vishnu Mathur had said while announcing the May figures.

Though poor car sales are being attributed to high interest rates and steep hike in petrol prices, the auto industry feels that if the excise duty on diesel cars is hiked, it would further hurt the growth. “Increase in prices of vehicles, following the excise duty hike in the budget (2012-13) had also had a major impact…even diesel vehicles, which used to have a lot of demand, had tapered off. If the government goes ahead and decides to tax diesel vehicles more, the overall demand will suffer all the more,” he added.