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7/31/2019 CRISIL Research-Auto_Diesel Article_08Jun2012 (2)

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CRISILOpinionJune 2012

Will additional taxes on diesel cars help?

AXT


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CRISILOpinion

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Will additional taxes on diesel cars & UVs help reducepetroleum subsidies?

In the 2012-13 Union Budget, the government has set stringent targets to contain its subsidy bill, of which

petroleum subsidies form a third. The options being considered include imposition of a one-time tax on new

diesel cars & UVs sold or an annual usage-based levy on existing diesel cars and UVs, which are aimed at

reducing the preference for these vehicles and thereby bringing down diesel consumption. CRISIL Research,

however, believes these options will not bring down the subsidy significantly or will be difficult to implement.

Furthermore, diesel cars & UVs account for just over a tenth of the diesel consumption. To bring about a

sustainable reduction in the subsidy burden, the government will have to hike diesel prices, and ensure that

in future also, diesel prices move in accordance with crude oil prices.

Petrol prices hikes alone cannot contain subsidy burden

The recent Rs 5-plus hike in petrol prices has again turned the spotlight on petroleum subsidies, which

account for nearly a third of the Rs 2,200 billion subsidy bill in 2011-12. In the Union Budget 2012-13, the

government has targeted to contain its petroleum subsidy bill at Rs 436 billion, about 40 per cent lower than

in 2011-12.

In 2011-12, petroleum subsidies shot up by almost 80 per cent to Rs 680 billion as crude oil prices rose and

the rupee weakened. Within petroleum subsidies, diesel alone takes up about 60 per cent. Under-recoveries

on diesel are at an all-time high of Rs 14 per litre at current diesel prices. Thus, hiking petrol prices alone

would not make any difference to the petroleum subsidy burden of the government.

Rising share of petroleum subsidies in total subsidies

6%

22%

32%

23%

-

500

1,000

1,500

2,000

2,500

2005-06 2010-11 2011-12 2012-13B

0%

5%

10%

15%

20%

25%

30%

35%

To tal go vt subsidy P etro leum subsidy P ro po rtio n o f petro leum subsidy to t otal subsidy (%) (RHS)

(Rs bil lion)

Note: Other major components of the subsidy bill include food and fertilisers

Source: CRISIL Research


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CRISILOpinion

Imposing additional taxes on cars and UVs offer limited benefits

Given the political compulsions that prevent major hikes in diesel and LPG prices, the government is

evaluating other options to discourage diesel consumption and reduce subsidies. The options being

discussed include levy of a one-time tax on all new diesel cars and utility vehicles (UVs) sold and collecting

an annual tax from all diesel cars and UVs based on usage. CRISIL Research believes that these moves will

not bring down the subsidy burden significantly or will be diff icult to implement.

Moreover, other vehicles like trucks and buses, which consume more diesel, remain untaxed. Of the total

diesel consumed in 2011-12, cars & UVs used up only 12 per cent, a third of what trucks and buses

consumed. (CRISIL Research has derived the share of diesel use by cars & UVs, based on an estimated

population of 3.6 million diesel cars in India as of March 2012. This formed about 23 per cent of the total

population of cars and utility vehicles. Of this, we have estimated that 47 per cent of the cars are for personal

use, and the remainder, for commercial use.)

Diesel consumption mix (2011-12E)

Roads, 48

Trucks and buses,

74

Cars & UVs

(Commercial),

19

Cars & Uvs (Perso nal), 7Others, 26

Railways, 3

Industry, 5

Agricult ure, 18

(per cent)

Source: CRISIL Research

In the following two paragraphs, we have presented our analysis of the options being discussed by the

government:

Collections from a one-time tax (estimated at Rs 90,000-Rs 140,000 per car depending on fuel and vehicle

use) on all new diesel cars and UVs sold would almost equal the subsidy borne by the government over the

life of the vehicle. This tax would form 16-20 per cent of a typical diesel cars price. However, since such a

one-time tax would be levied on only new vehicle sales, the government will be able to collect only Rs 58-60

billion annually which forms only 12-15 per cent of the total diesel subsidy bill (estimated for 2011-12).

Secondly, as the life, mileage and distance travelled would be different for personal-use and commercial-use

cars and utility vehicles; levying a common tax would be difficult.


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An annual usage-based tax on all diesel cars and UVs would, as per our estimates, amount to an

additional 2 per cent of the vehicle price annually for personal-use cars and 5 per cent for commercial-use

cars. However, for collecting an annual tax, the government would have to rely on RTOs, which are

fragmented and not so well-equipped. Thus, it would be difficult to collect taxes regularly and monitor non-

payments, which renders this option unviable too.

Moreover, Indian car and utility vehicle buyers already pay 26-30 per cent of the vehicles retail price as tax,

as compared to a 16-20 per cent tax in Korea and Germany and an 8-12 per cent tax in Japan (excluding

scrappage and carbon tax which are annual in nature). Additional taxes on cars & UVs would, therefore, only

burden consumers further.

Diesel price hike of 10-15 per cent inevitable

To contain under-recoveries on diesel at last years level of Rs 9 per litre, the government would need to hike

diesel prices by at least 10-15 per cent. This would reduce petroleum subsidies by about 25 per cent in

2012-13, and also curb the rising share of diesel in petroleum subsidies. However, such a hike in diesel

prices would also stoke inflation.

All fuels together have a weightage of about 15 per cent in the wholesale price index (WPI). Diesel alone

accounts for close to 5 per cent in the WPI. Hence, a 10 per cent increase in diesel prices will directly result

in a 0.5 per cent increase in inflation. A hike in diesel prices will also indirectly impact inflation, pushing up

input costs for manufacturing, which would be passed on to consumers through higher commodity prices.

The extent to which prices are passed on would depend on demand.

Deregulating diesel prices - the only long-term solution to cut subsidy burden

While fears of high inflation, lower GDP growth and political compulsions had restricted the government from

hiking diesel prices so far, the need to keep diesel prices regulated, even as subsides keep mounting, is also

being increasingly questioned. Globally too, petrol and diesel prices do not vary much. In most countries

within the EU and in the US, diesel and petrol prices are similar the difference between the two is not more

than 15 per cent. By contrast, in India today, petrol prices are close to 2 times higher than diesel, reflecting

both higher subsidies and higher taxes on petrol. (Taxes on petrol in India are at about 45 per cent of the

selling price as compared to less than 20 per cent on diesel).

CRISIL Research believes that biting the deregulation bullet and ensuring that diesel prices moves in line

with crude oil prices would bring about a sustainable reduction in the subsidy burden, which will also provide

the government funds for other development activities. Discouraging diesel consumption by imposing

additional taxes on private and luxury diesel vehicles would only minimally cut down petroleum subsidies.

(Please note that the views expressed here are those of CRISIL Research and not of CRISILs Ratings

division. CRISIL Research operates independently of and does not have access to information obtained by

CRISIL's Ratings Division.)


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CRISILOpinion

Notes


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crisil research-auto_diesel article_08jun2012 (2)

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