Diesel vehicle tax to hit investment: Mahindra

Mahindra & Mahindra (M&M), the country's biggest utility vehicle maker, on June 6,2012 said it will have to put off investment decisions worth Rs 4,000 crore for a new plant if the government slaps a hefty special additional tax on diesel vehicles, a demand made by the petroleum ministry and currently being considered by the finance ministry. “The ‘policy uncertainty’ on diesel is affecting new investment plans and making India an unattractive destination for fresh investment by auto companies”, Pawan Goenka, president of M&M's automotive division, said.

Goenka, who was here to meet finance ministry officials as part of a delegation of industry body Society of Indian Automobile Manufacturers (SIAM), said any additional duty on diesel vehicles has the potential to slow down demand and distort growth projections. Companies in the automobile sector decide on investment plans based on certain growth assumptions, he said. "If the government comes up with a sudden additional duty on diesel vehicles - even when this was not done in the Budget in March - we have to downwardly revise our growth forecast. If this happens , then investments will certainly come down."

Demand for diesel vehicles have been surging, propped by the huge price differential between the retail price of petrol and diesel. While the government has deregulated petrol and increased its price at regular intervals, it has not done so in the case of diesel, which still enjoys a subsidy. M&M had earlier earmarked an investment of Rs 4,000 crore for a new plant for which the company is talking to various state governments, including Tamil Nadu and Maharashtra . Goenka said the new investment plan was decided considering that the company's sales will grow at a rate of 20-25 % till the middle of 2014.

"Our forecast suggested that we will hit peak monthly capacity of 24,000-25 ,000 vehicles at Chakan and run out of capacity by the middle of 2014. However, a new tax will impact these projections and thus our investment plans." On its part, the government has made it clear that it is not going to raise diesel prices any time soon as it may fuel inflation . Finding it difficult to do so, the oil ministry has demanded an additional excise duty of Rs 80,000 on diesel vehicles, something not accepted in the Budget but finding increased acceptance now. The finance ministry has already said it is looking to raise excise duty on diesel vehicles to discourage consumption of the subsidised fuel while bolstering the Government's tax revenues.

"The proposal is there and that is being examined by the finance minister. Consultations are being held and an appropriate decision will be taken by the government in due course," Central Board of Excise and Customs chairman S K Goel said earlier this week.

M&M's Goenka said a diesel tax will hit the already-slow demand in the passenger vehicle market. "Diesel vehicles are leading the demand for passenger vehicles. A hefty tax on diesel vehicles will kill demand for diesel vehicles while slowing down investments."

Instead, he said, the government should decontrol even partially-diesel's retail price. "Why can't diesel prices increase in tandem with petrol? Why has the gap widened? You cannot live in artificial protection of prices and thus a way has to be found to increase diesel fuel prices."

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