Discuss the future of small diesel cars specifically Nano.

Impact of Excise on Diesel Cars

The diesel version of the Nano, scheduled to debut in the second half of 2010-11, could be the worst hit if the Centre accepts the Kirit Parikh panel’s recommendation of imposing a flat Rs.  80,000 excise levy on all diesel cars. Though, there is still no official word on the possible price tag of the car, the top-end could cost around Rs.  2.7 lakh (on-road, in Mumbai) given that its petrol sibling is nearly Rs.  2 lakh.

Should the Rs.  80,000 levy be imposed, the 800cc Nano diesel will be closer to Rs.  3.5 lakh which will put it on at par with the basic Hyundai Santro (petrol) or the present Indica V2 (diesel). And to think that, Tata Motors wanted to position the Nano as “the people’s car”.

Current Levy Structure

The present excise duty for small cars (those under four metres with maximum engine capacities of 1.2 litres for petrol and 1.5 litres for diesel) is 8 per cent. However, the imposition of the additional Rs.  80,000 would mean a net excise levy of nearly 35 per cent for the diesel Nano which experts say “borders on the absurd”.

This would be equally true for all compact diesels, though in terms of percentage, the levy would be gradually lower with higher price tags. “Simply put, the Rs.  80,000 excise levy would make a mockery of the present eight and 20 per cent classifications on small and large cars,” sources said.

Typically, diesel cars such as the Indica, Logan, Indigo and the Innova-multipurpose vehicle, are used as taxis, but this user segment is reimbursed by the excise levy which means it would not be passed on to the end-user.

It is also strange why cars are always the ones to bear the cross for any muddle concerning fuel prices. Last fiscal year saw the worst crisis in recent times when crude prices went out of control and the Centre promptly slapped an additional Rs.  15,000-20,000 levy on all cars with engine capacities of 1,500cc-2,000cc. The move, intended to penalise fuel guzzlers, largely impacted diesel utility vehicles. Naturally, there was a lot of heartburn because the Centre was not being seen as too proactive in taking hard decisions on raising prices instead.

Subject of Controversy

In fact, diesel vehicles have always been the subject of controversy for years now. In the early nineties, multi-utility vehicles, with a certain seating capacity, were given sops on excise duty which effectively sealed the fate of the petrol-driven Maruti Gypsy.

The Centre then introduced another norm in 1994-95 where only those MUVs weighing over 2,700 kg could be eligible for the lower duty. “It did not take too long for manufacturers to add a whole lot of steel in their vehicles so that they paid less,” sources recalled.

Sanity in the excise duty structure soon prevailed, but the reluctance to hike auto fuel prices resulted in the automobile sector taking the rap instead, the latest being the Kirit Parikh panel’s salvo on the Rs.  80,000 levy.

There is no question that the subsidy on diesel is the root cause of this problem. It is unlikely that the Centre will tamper with its price because its fall-out on freight rates would stoke inflation levels which are already hurting consumers.

Ideally, the automobile sector, after this recommendation, would rather be junked. In the event Cabinet seconds the proposal, experts believe the best way forward is to go in for duty gradation where small cars are imposed an additional 8 per cent while other diesels vehicles 12-16 per cent levy.

Source: Dr Mittal, Vivek. Business Environment.. Excel Books Publications, New Delhi.

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