The finance ministry is considering raising the excise duty on diesel cars in Budget 2012-13. But, cigarettes may not see higher excise duty, as a proposal to this effect on “sin goods” may not get the ministry’s stamp in the Budget expected to be tabled by the middle of March.
“There is a proposal to increase the duty on diesel cars. We are looking into it,” said a finance ministry official. “A higher duty on cigarettes can lead to increased smuggling. It’s not difficult to smuggle cigarettes, given their small size,” the official added.
While the overall automobile market has not been witnessing its once robust growth since mid-2011, the demand for diesel-run cars has surged. In fact, buyers are increasingly ready for waiting periods running into months, as the gap between petrol and diesel prices has widened.
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Diesel cars now constitute nearly 40 per cent of car sales, compared with less than 20 per cent a few years ago.
Car sales by market leader Maruti Suzuki, which focuses mainly on petrol variants, fell about 16 per cent in the first nine months of the financial year. On the other hand, Mahindra & Mahindra, which only makes diesel vehicles, and Tata Motors, which predominantly makes diesel cars, have seen strong growth.
Several companies are awaiting a clear picture on the excise duty before finalising plans to invest more in diesel capacity. “In the absence of any clear policy, we are in a dilemma,” news agency Reuters quoted Mayank Pareek, head of sales and marketing of Maruti Suzuki, as saying.
Slackening demand compelled Maruti to reduce production of petrol models in August, while there is a waiting period of several months for its diesel vehicles.
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However, some companies are trying to be flexible in their plant usage, depending on the requirement for petrol or diesel variants. For example, the Chennai plant of Nissan Motor Co has this option. A Nissan official said recently the plant could be suitably moulded to offer diesel or petrol versions.
The government is looking at various options to increase its tax proceeds in the light of a higher expenditure on subsidies, the expected burden of the proposed food security law and moderating economic growth.
However, the finance ministry official said a higher duty on diesel cars and even if levied on cigarettes would not add much to the government kitty. Cigarettes add roughly Rs 10,000 crore to the excise collections every year, about six per cent of the Budget estimate of Rs 1,64,116 crore for excise duty in 2011-12.
At present, the government levies 10 per cent excise duty on small cars and 22 per cent plus Rs 15,000 on big cars, whether on petrol or diesel. However, there is a difference in the definition of small and large cars run on petrol and diesel for the purpose of excise duty. The government will have to decide the manner in which a higher duty on cars running on subsidised fuel could be passed to the oil marketing companies, suffering from a hit in profitability because of high crude oil prices.
In the last 15 years, with the exception of 1996-97 and 2004-05, petrol consumption growth has been more than diesel. But, in April-November 2011, diesel growth stood at 7.4 per cent, as against petrol growth of 4.3 per cent.
The ministry may create a new rate slab for increasing the duty on diesel cars or add a specific amount over and above the duty.
The industry is against a specific amount, as it may lead to distortions. There is also an option to levy surcharge.