Diesel car prices may increase by Rs 2.55 lakh if special tax is imposed

Diesel cars may get expensive by Rs 2.55 lakh, with the oil ministry planning to impose a special tax on such vehicles. The government plans to impose additional levies of Rs 1,70,000 on small diesel cars and Rs 2,55,000 on medium and large diesel vehicles like sedans and SUVs to check dieselisation of the economy, triggered by the widening gap between petrol and diesel prices. 

"The oil ministry has asked the finance ministry to impose additional excise duty on diesel cars and the matter is under consideration," a government official said. 

Diesel cars are more fuel efficient than petrol and offer 30% more mileage, which has prompted many to opt for such cars. Besides, diesel price has been frozen in the country for almost a year due to political compulsions that has made it almost 74% cheaper than petrol. Helped by this increasing price differentiation, sales of diesel cars have zoomed to over 55% of the total 1.63 lakh units sold in May this year, up from mere 38% last year. 

Oil ministry officials confirmed that its proposal to impose tax was "favourably" considered. "The money thus raised could be used to meet part of the under-recoveries (revenue losses of state oil firms in selling fuels below market rates)," an oil ministry official said. 

However, carmakers aren't amused and argue that any move to further tax cars is likely to impact demand. "Sale of new cars is already slowing. We have cut production of our petrol models in tandem with the changing market dynamics, and any tax on diesel cars would further taper off demand," said Maruti Suzuki MD S Nakanishi. 

Car sales have already hit a bump with 3% growth in the first two months of the current fiscal, largely hit by higher price coupled with the hike in excise duty by the government. 

But demand for diesel cars has been steady, even after the government imposed 5% excise duty on all bigger vehicles with more than 1,500cc engine capacity while a general 2% excise duty was raised on all other vehicles. 

The demand for diesel cars is on the rise for the past few months, and to set the house in order, the industry body Society of Indian Automobile Manufacturers (SIAM) has asked the government to remove the fuel price distortion. 

"The only meaningful way to reduce price differential between petrol and diesel is to offset the huge imbalance that has changed the demand pattern in the Indian passenger car market," said SIAM president S Sandilya. Analysts say that any addition tax on new diesel cars and utility vehicles will not reduce the government's subsidy burden.