Today's Editorial

Today's Editorial - 24 September 2023

Tax on diesel vehicles

Source: By Anil Sasi: The Indian Express

Road Transport Minister Nitin Gadkari said on 12 September 2023 that people needed to move away from fuels such as petrol and diesel, and that if the use of diesel-run vehicles (and equipment such as diesel-run generators) continued, he might consider proposing to the Finance Minister that an additional 10% GST be imposed on these vehicles as “pollution tax”.

However, Gadkari clarified soon afterwards that “there is no such proposal currently under active consideration by the government”. “In line with the government’s commitments to reducing air pollution levels caused by hazardous fuels like diesel, as well as the rapid growth in automobile sales, it is imperative to actively embrace cleaner and greener alternative fuels…,” he posted on X.

Auto stocks plunged immediately after the announcement. This is because, despite the clarification, the Minister’s statement was broadly in line with the pushback in policy circles against diesel, and came a little over three months after a committee appointed by the Ministry of Petroleum and Natural Gas recommended a ban on diesel four-wheel vehicles by 2027 in cities with a population of more than 1 million.

The government already imposes a 28% tax on diesel cars, plus an additional cess depending on the engine capacity, taking the total tax to almost 50%.

Why is there a pushback against diesel?

Gadkari’s comments and the panel’s report follow the government’s stated aim to reduce greenhouse gas emissions and to produce 40% of India’s electricity from renewables as part of its goal to achieve net zero emissions by 2070.

Diesel accounts for about 40% of India’s petroleum products consumption, according to estimates by the Petroleum Planning & Analysis Cell, the official data source for the hydrocarbon sector.

Around 87% of total diesel sales are to the transport segment, with trucks and buses accounting for about 68% of diesel sales in the country. Three states — Uttar PradeshMaharashtra, and Haryana — account for almost 40% of the diesel sold in India.

What about diesel-run cars?

Maruti Suzuki, India’s biggest carmaker, stopped making diesel vehicles from 1 April 2020, and has signalled that it does not plan to re-enter this segment. Tata MotorsMahindra, and Honda no longer produce 1.2-litre diesel engines; diesel variants are available only for 1.5-litre or bigger engines.

While diesel variants are still available from Korea’s Hyundai and Kia, and Japan’s Toyota Motor has its Innova Crysta range, most carmakers have substantially moved to deleverage their diesel portfolios since 2020. As a result, the contribution of passenger vehicles to overall diesel demand has fallen to 16.5% currently, considerably lower than the 28.5% in 2013.

Why have carmakers started to move away from diesel?

The higher compression ratio of diesel engines means increased emissions of oxides of nitrogen (NOx), which is one of the main drawbacks of diesel engines versus petrol.

Globally, the biggest blow to diesel was the Volkswagen scandal of 2015 — the German automaker was found to be activating emissions controls in its diesel engines during lab tests while allowing them to emit dozens of times more NOx in actual driving — which led to a rise in the negative perception about diesel across markets, including India.

Also, the reason why Maruti Suzuki and other carmakers announced an exit from the diesel segment was the rollout of the new BS-VI emission norms that kicked in from 1 April 2020, and the prohibitively high cost of upgrading their diesel engines to meet the new standards. The manufacturers have argued that the government’s decision to leapfrog directly from BS-IV to BS-VI made the retention of diesel in their portfolio unviable.

What is the reason an individual user might prefer diesel to petrol?

The higher fuel economy of diesel engines compared to petrol is a factor. Diesel has greater energy content per litre, and diesel engines are inherently efficient. Diesel engines do not use high-voltage spark ignition (spark plugs), and use less fuel per kilometre as they have higher compression ratios. This makes diesel the fuel of choice for heavy vehicles.

Also, diesel engines offer more torque (rotational or turning force), and are less likely to stall as they are controlled by a mechanical or electronic governor, thereby proving to be better for haulage.

For individual car owners too, there is the issue of the cost of running the vehicle. Indian car buyers’ romance with diesel powertrains lasted nearly a decade — and in 2013, diesel cars accounted for 48% of passenger vehicle sales in the country. The main reason for this was the significantly lower price of diesel compared to petrol — at its peak, the difference was a yawning Rs 25 per litre.

But this changed when the decontrol of fuel prices started in late 2014. The price difference is now around Rs 7 per litre — the closest the two fuels have been in price since 1991. Diesel cars accounted for less than 20% of overall passenger vehicle sales in 2021-22.

A further increase in taxation on diesel vehicles will impact sales further given that the tax incidence on this segment is already very high — and force companies that have a diesel portfolio to reconsider the viability of diesel engine cars.

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