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Drumbeat: Ad Buzzaar
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Thursday, June 4, 1998
An innovative tax policy for automobiles
R JAGANNATHAN
The flap over petrol prices seen barely 24 hours after the announcement of the budget suggests that the government does not have a sensible, integrated policy for the automobile sector. The issue is not whether petrol prices should go up by Re 1 or Rs 4 at the retail pump; the misunderstanding between the petroleum and finance ministries about who will absorb the excise burden on petrol can also be dismissed as a minor embarrassment for the government that it will soon live down; but what is pathetic is the sheer absence of innovative ideas for evolving an automobile policy for India.Look what the budget has done. There's a Re 1 cess on petrol to finance roads. There is a hike in the excise on petrol from 20 per cent to 35 per cent. The excise on multi-utility vehicles has been raised form 25 per cent to 30 per cent; something similar has happened to tyres. Customs duties have gone up on engine parts. Not all the moves are silly. But what is clear is the folly of using automobiles and auto-fuels as mererevenue-raising vehicles-never mind how this warps the development of the whole sector. Any automobile policy for India should attempt to: Make public transport the most efficient means of mass movement.
Make private transport affordable to more of its citizens.
Encourage green technology to arrest and reduce automobile pollution.
Make users of roads pay for their construction and upkeep.
Price fuel in such a way as to tax excessive usage of private vehicles.
Make users of diesel cars pay as much for fuel as petrol car owners do.The budget, unfortunately, only skews the picture. Hiking petrol prices pushes more people towards diesel cars. So we have the unholy spectacle of owners of diesel Mercedes vehicles paying less than half the price for fuel compared to Maruti 800 owners. Raising the duties on tyres and tubes may bring in more money to the exchequer-but it could also increase the cost of public transport. So how do we achieve the seemingly contraryobjectives set out earlier? Answer: by totally rejigging the taxation regime for automobiles and auto fuels. Luckily, we are in the happy position of asking for our cake and eating it too: we can have cheap vehicles, cheap public transport, higher revenues, quicker employment growth and higher investment in infrastructure if we follow the right auto policies. Here are some suggestions: The excise duty on all cars must be reduced by a substantial 20-30 per cent. This would bring excise on the smallest cars to 10 per cent. Excise on a Merc would not be more than 20-25 per cent. On two-wheelers, the excise should be between 5-10 per cent. This drastic reduction will achieve two things: automobile demand will double within two to three years since it is highly price-sensitive. A McKinsey study in Brazil found that a 20-25 per cent price reduction resulted in 60-80 per cent demand growth almost immediately-a price elasticity of 2.5. Even if the Indian growth rate is less spectacular, there is no way thegovernment will lose money by reducing excise. The aim of any transport policy should be to make available cheap options for travel by the poor and underprivileged. This can be ensured simply by bringing all excise duties on commercial vehicles and their components, including high-tax items like tyres, to zero. Yes zero. The revenue loss will be more than made up by a reduction in the losses of state transport undertakings, but there could be other tax measures to make up for the revenue loss at the central level. For example: There could be a special tax on cars and multi-utility vehicles (MUVs) which use diesel as fuel. Taxes ranging from Rs 50,000-Rs 2,00,000 per vehicle will raise more than Rs 1,000 crore annually on diesel vehicle sales of 1,00,000 or thereabouts-assuming an average tax of Rs 1 lakh per vehicle. Given the overall fall in excise on cars and MUVs, the demand for diesel vehicles could remain buoyant even after this special tax is imposed. Leaded petrol must, as a matterof policy, be priced 10-15 per cent higher than regular petrol. This will fuel further demand for new cars with catalytic converters, and push up central revenues even while reducing lead pollution. The basic principle of automobile taxation should be to tax the usage of private vehicles, not their ownership. The basic car should be cheap to own, but fuel, road taxes and tolls can be pricier. There should be high tolls for inner-city car use, parking on public roads and highways. This will stimulate demand for car ownership while simultaneously reducing their excessive usage and pollution.Our national goal in automobiles should be to think millions: a million cars every year; three-four million two-wheelers; half a million buses and trucks for cheap passenger and cargo movement. A huge bonus: if we achieve this, the employment generated in road building and maintenance, automobile garages and roadside eateries, toll booths and parking lots will bring about a veritable revolution in the economy. Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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