Alok Bansal: Hefty road taxes take their toll

The present rate of tolls and other taxes on road transport are not justified. The government needs to review its policy.

It is a well known fact that the more a business is taxed, the less quickly it grows. This is true of India's road sector as well, as can be seen from a 2004 study published by the World Bank.

Called India "" Financing Highways, the study found that the contribution of road sector taxes to total tax collection by the Centre and state governments was 15.5 per cent. In the US, the corresponding figure is a mere 3.6 per cent. In most European countries it is between 5 and 7 per cent. But even this does not tell the whole story because the petroleum sector, on the whole, contributes around 25.5 per cent to the total central exchequer. The road sector is a major consumer of petroleum products and, therefore, contributes indirectly as well to the total tax kitty.

India has the highest level of levies on petrol and diesel in the Asia-Pacific region of 32 per cent and 16 per cent respectively. This is almost three to 10 times that in other countries in the region. Since the publication of the World Bank study, the cess on petrol and diesel has been raised to Rs 2 per litre from Rs 1.50. To this must be added the high states sales taxes on both petrol and diesel. These average about 25-30 per cent compared to about 15 per cent in the other countries in the region.

The study also revealed that in 2002-03, while the total taxes collected from the road transport sector were of the order of Rs 500 billion, expenditure on all roads, including the cost of administration, was only Rs 211 billion, about 42 per cent of the total revenue from the sector.

This high level of taxes increases the cost of transportation and affects the global competitiveness of the economy.

The story is not different in respect of tolls either. The government has embarked on massive road development programmes. These involve the private sector, which will recoup its investment through tolls.

According to the notifications issued by the government, toll rates are fixed based on a percentage of savings that a vehicle will make after the roads are widened. These rates are currently fixed at Rs 1.5 per kilometre for two-axled truck and buses.

However, in another recently completed study by the World Bank called the "India-Road Transport Efficiency Study, 2005," the estimated savings from widening of a two-lane road to a four-lane road for a two-axled truck is Rs 72 per hour. For the 1,400 kilometre trip between Delhi and Mumbai, the running time for a truck was found to be about 35 hours, at an average speed of 40 kilometres per hour, for a two-lane road with congestion. This gets reduced to about 23 hours at an average running speed of 60 kilometres per hour if there is no congestion.

The total trip time, however, the study found, does not come down because it includes stoppages due to various check posts, halts for food and relaxation by the crew, loading and unloading of vehicles and waiting for the consignment for the return journey as these remain more-or-less the same. So the total saving in the trip time is only about 12 hours, corresponding to savings in operating costs of Rs 864 only or Rs 0.62 per kilometre as against the toll rate of Rs 1.50 per kilometre.

Since the savings from improved roads are estimated to be less than the incidence of toll, additional tolls and high taxes would finally be passed to consumers of the road freight transport. This will increase the economic costs of products and adversely affect the competitiveness of Indian goods in the global market. Uttar Pradesh, Punjab, Haryana, Rajasthan, Madhya Pradesh and Bihar would suffer the most due to the increased cost of inland transport for export and import cargo, which forms about 20 per cent of the total transportation cost for cargo from these states.

Clearly, the government needs to review its policy in respect of road sector taxation.

The writer heads the Transport Division of the World Bank in New Delhi. The views are personal