Taxes and other policies are geared towards encouraging a shift to electric vehicles to promote fuel economy and energy security
Maruti Suzuki Chairman RC Bhargava has tried to make a case for reducing taxes on petrol and diesel cars. At a recent media interaction, he said that the automobile industry cannot grow with a 50 per cent tax levied on these cars. Bhargava’s criticism of ‘high’ taxes on cars is sweeping and is not supported by the actual situation on the ground. His remarks should be viewed in the context of Finance Minister Nirmala Sitharaman’s observations on this issue at the 48th GST Council meeting.
She clarified that cars with a capacity of over 1500 cc, a length of more than four metres and a ground clearance of at least 170 mm attract a 22 per cent compensation cess. There is nothing novel about this provision. Overall, the case for reducing the GST on fuel cars, now at 28 per cent, is weak because taxes and other policies are geared towards encouraging a shift to electric vehicles to promote fuel economy and energy security. It should be noted that the transport sector accounts for 50 per cent of oil demand, and oil in turn meets about a quarter of the country’s primary energy needs. Hence, all fuel vehicles attract a GST of 28 per cent, whereas all EVs are subject to a 5 per cent levy. A tax mop-up through fuel vehicles is not just about nudging consumers towards EVs. It will act as a cushion against future loss of excise revenues from petrol and diesel.
However, within cars, the compensation cess varies from small to large vehicles, which is also calculated to spur fuel economies and curb congestion. Therefore, cars with an engine capacity of less than 1200 cc and 1500 cc, respectively, and a length of less than four metres attract a cess of 1 per cent and 3 per cent. These entry level cars, therefore, are subject to an applied duty of 29 per cent and 31 per cent, respectively. Cars with a similar engine capacity (could exceed 1500 cc) but a length of more than four metres can attract a cess of 17-20 per cent, depending on whether they are mid-size or large. SUVs (longer than four metres, an engine capacity of more than 1500 cc and high ground clearance) will attract a 22 per cent cess. So, it is only in the case of SUVs that the tax amounts to about 50 per cent. Hence, the lament that small cars need positive discrimination is not convincing, as that is already in place.
Steps other than taxes can be considered to promote small car use over SUVs (whose sales have exceeded non-SUVs this year), such as a congestion tax that varies by car size. The shift from 2W to 4W should be EV-driven. While the Centre has done a great deal to promote EVs through FAME II consumer incentives, PLIs, lower taxes and minimal conditions for setting up charging infrastructure, a further push is needed. While it is true that battery costs have been declining, except for this year, and charging time is coming down, the battery ecosystem is still developing, including swapping systems. Policy-wise, India is well placed for the energy transition.