Budget 2012: Is Tax on Diesel Vehicles a Valid Move?

Every year, Government spends 67,000 crore on diesel subsidy every year, whose major part goes to the expensive car buyers. The fact that diesel cars sales are up by 40 percent has made the government to take this political move, so that it can earn good revenue to ease the subsidy burden.

Petroleum Minister Jaipal Reddy had put forward the idea of putting a flat 80,000 penalty tax on all new diesel cars sold in the country. But industry experts question how 4 lakh diesel car and 20 lakh luxury car can have the same penalty tax. "It is this uncertainty that bothers them more than anything else," says Mohit Arora, Executive Director of J.D. Power.

On the other hand, Indian automobile consumers’ demand will be affected due to this rise in cost of diesel. In a country where the population is 1.2 billion, 2 million vehicles are sold annually, cars are still a luxurious and discretionary item and its demand highly depends upon sentiments, interest rates and other factors. Hence this penalty tax will definitely impact the cheaper low end cars. But in case of costliest cars, the demand is not price sensitive.

Whereas environmentalists say that though diesel is more fuel efficient than petrol, but it is a dirty fuel and its usage must be deceased in India. Diesel cars produce less Carbon Dioxide but produce more of Nitrogen Oxides which is very toxic. Europe, the most environmentally conscious regions, has most of diesel cars.

If government implements its action of putting additional tax on diesel cars, then the most affected companies will be M &M, and Tata, who are mostly dependent on diesel cars segment.