Formula to tax diesel cars ineffective, says CSE

Digs holes in Kirit Parikh panel’s report

• Centre for Science and Environment blasts Kirit Parikh panel report on petroleum pricing that fails to offer effective solution to halt misuse of under-taxed diesel by rich car owners

• Additional excise duty of a mere Rs 81,000 on diesel cars to equalise the excise tax burden on petrol car proposed by the panel – CSE says this is too little too late. The yawning gap between petrol and diesel will continue to incite deadly trend in diesalisation of cars and increase public health risks from toxic emissions

• CSE demands substantial and effective increase in excise duty on diesel cars and SUVs if the taxes on fuels cannot be equalized immediately

• Cheaper diesel fuel will also encourage more cars, more driving and more fuel guzzling in the rebound

 
New Delhi, February 5, 2010: The long-awaited pricing formula for petroleum products has been tabled by the Kirit Parikh panel – but the prescription falls woefully short of correcting the distorted taxes on automotive fuels (petrol and diesel), says Centre for Science and Environment (CSE).

Because of the distortions in taxes, contends CSE, rich car owners have rampantly misused the under-taxed and under-priced diesel.

Says Anumita Roychowdhury, associate director, CSE and head of its air pollution and urban mobility team: “The panel’s formula is not effective enough to check deadly dieselisation of the car segment that threatens to make our air more toxic, as clean diesel fuels and technologies are still not available in our country. The market share of diesel cars is already over 30 per cent of new sales and is expected to be 50 per cent in a couple of years. Car industry has massively scaled up its diesel car production capacity - without having the requisite clean diesel fuel and technology in place.”

Keeping in sight the forthcoming Union Budget, CSE has shot off a letter to the finance minister Pranab Mukherjee, urging him to look into this matter and take necessary steps to equalise or effectively reduce the tax differential between diesel and petrol.

What’s wrong with the panel’s formula?

• Fuel prices to be deregulated, but taxes remain skewed: The panel proposes to deregulate fuel prices to allow them to move freely with international pricing trends, but has done nothing to reduce the differential in excise duty on petrol and diesel fuel that is nearly 70 per cent.

• Tax differential justified in the name of agriculture and freight, but rich car owners benefit more: The Parikh panel’s justification for lower taxes on diesel is that diesel is used in different and essential economic activities such as agriculture and freight transport. Ironically, the panels’ own report shows cars are the second biggest beneficiaries of the official tax policy. Cars use up 15 per cent of the total diesel in the country – compared to 12 per cent by buses and agriculture, 10 per cent by industry, and 6 per cent by the railways.

• Additional excise duty on diesel cars proposed to equalise the excise tax burden, but this will be ineffectual: The panel has acknowledged that the higher excise duty on petrol compared to diesel is encouraging diesel cars. But instead of correcting the fuel taxes, it has proposed a mere Rs 81,000 as additional excise duty – this is expected to act as `the equaliser`. The panel completely ignores that this slightly dearer cost of diesel car cannot neutralise the incentive of the cheap running costs that the skewed taxes and cheaper diesel fuels continue to provide. The panel has also extrapolated the incidence of additional excise on SUVs on the basis of petrol cars. This is misleading as SUVs guzzle more fuel and mostly run on diesel; the tax incidence on SUVs needs to be much higher.

• Revenue implications of dieselisation ignored: The government is incurring huge revenue losses due to dieselisation of the private car fleet. It earns much less from excise on a litre of diesel used by cars (as opposed to petrol) -- thus, revenue losses per litre of diesel will be compounded with the increase in diesel car sales. On the other hand, diesel car owners recover their premium within four years, given lower diesel prices. This perverse subsidy to the rich comes at an enormous cost to public health. In countries like Brazil, diesel cars are actively discouraged because of the policy to keep taxes lower on diesel. In China, taxes do not differentiate between petrol and diesel.

• Environmental fallouts of skewed taxes swept under the carpet: The panel, in fact, justifies its move on the ground that diesel cars and SUVs have greater fuel efficiency and should not be penalised. “For the panel, it is okay if people opt for a diesel vehicle to drive much more than an average petrol car,” says Roychowdhury.

The panel’s crime of omission: environmental fallouts of dieselisation

• Enormous public health costs: Emissions data available from the Automotive Research Association of India has already shown that diesel cars, on an average, emit seven times higher toxic particulates and three to five times higher nitrogen oxides. Official policies are encouraging massive dieselisation of the car fleet when ‘clean’ diesel (less than 10-15 ppm of sulphur) is not available in the country. According to WHO and other international regulatory and scientific agencies diesel particulates are carcinogens.

• Even though a few Indian cities will introduce Euro IV emissions standards from April 2010, it will not be adequate to address toxic emissions from diesel and the pollution costs associated with it. According to the European Commission, the total pollution cost of a Euro IV diesel car is Euro 1,195, while that for a petrol version is Euro 846.

• Cheaper diesel fuel, more oil guzzling: Studies in Europe have shown how use of cheaper diesel used in bigger vehicles and SUVs undermines the efficiency gains of improved vehicle technology -- actual fuel consumption goes up. Governments across the world are increasing taxes on bigger cars like SUVs (as in China) to minimise the energy and pollution impacts.

• Climate benefit of diesel is suspect: Diesel is also a bad news from the perspective of carbon emissions. While more efficient diesel cars may emit lower carbon dioxide per kilometre compared to a petrol car, more carbon dioxide is emitted per litre of diesel fuel burnt. This is because diesel has a higher carbon content than petrol. Now, science also implicates black carbon in diesel particulates for trapping more heat and warming.

“Clearly, any further delay in reforming the taxes on fuels can have serious economic and environmental consequences. Distorted pricing will particularly worsen the pollution and energy impacts of explosive diesel car growth,” says Roychowdhury.

In its letter to the Union finance minister, CSE has demanded substantial and effective increase in excise duty on diesel cars and SUVs if the taxes on fuels cannot be equalized immediately. Anything less than this, says the Centre, will not be adequate to stop the massive dieselisation of the private vehicle fleet in the country, which is bad for the environment.

At the same time, it has also asked for rationalisation of the definition of the small car, that is more lax for diesel cars and is leading to massive dieseliation. SUVs that guzzle more fuels and also use diesel should be taxed higher, says the CSE letter.   Click here to Read CSE letter to Union Minister of Finance (.pdf)

For more on this, please get in touch with Anumita Roychoudhury on 9811793923, or write to her at anumita@cseindia.org.