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Excise duty on diesel cars likely to be raised in Budget
November, 21st 2011

Despite frantic lobbying by the automobile industry, the Government is likely to hike the excise duty on diesel cars in the next Budget.

While the Petroleum Ministry has been asking for some sort of check on diesel cars with a view to capping the burgeoning demand for diesel, the Heavy Industries Ministry has been opposing this.

Now, the Heavy Industries Ministry, the nodal ministry for the automobile sector, is learnt to have indicated its support for increasing the excise duty.

This will be bad news for the automobile sector, as the soaring demand for diesel cars has been helping to prop up sales volumes, even as sales of petrol variants have taken a hit after the recent surge in fuel prices.

What's more, the industry's demand for reduction of duty on bigger cars (engine capacity of more than 1,200 cc for petrol and 1,500 cc for diesel) is also unlikely to be accepted.

Final thinking on both these issues will emerge after the pre-Budget consultations between the Finance Ministry and the Ministry of Heavy Industries, a senior Government official said.

The Petroleum Ministry has been pitching for higher excise duty on diesel cars in order to reduce the subsidy on diesel. As diesel is cheaper by over Rs 25/litre, the rising demand for diesel driven by higher diesel car sales has been pushing up losses for the petroleum marketing firms.

At present, oil marketing companies are selling diesel Rs 10.17 cheaper than its cost. The loss on diesel for these companies in the first half of the year is estimated at Rs 37,719 crore.

The official said that since differential fuel pricing for diesel cars is not possible, using taxation is the only option. Such a move will help raise additional revenues while cutting losses for oil marketers.

At present, petrol cars (up to 4 metres long and 1,200 cc engine capacity) and diesel cars (up to 4 metres and 1,500 cc engine capacity) attract 10 per cent excise duty. On the other hand, petrol cars (longer than 4 metres and engine capacity above 1,200 cc) and diesel cars ( more than 4 metres in length and engine capacity above 1,500 cc) attract excise duty at the rate of 22 per cent, plus Rs 15,000.

The auto industry is lobbying hard to bring down the duty on bigger cars from 22 per cent to 16 per cent. However, this effort has not gone well within the Government. If somebody can afford to buy high-end or luxury cars, what is the rationale of giving relief to these affluent buyers, the official added.

Growth in passenger vehicles declined by 20.25 per cent in October.

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