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FM Considering Luxury Tax on Diesel
The central government sells diesel at a subsidized price as it is used by farmers in tractors. However this subsidy has been attacked by several economists as most of the diesel sold in India is either bought for cars or by industries. To check this anomaly, Mr Mukherjee has said diesel sold to passenger cars might attract a luxury tax.
What would be the repercussion of this luxury tax on diesel? Carmakers have already invested hundreds of crores in developing new diesel cars. The immense price difference between petrol and diesel lead to Indian car buyers switching to diesel cars. Now the luxury tax will bring down the price difference and car buyers might then switch back to petrol cars. All the investment by carmakers would go a waste.
Looking at a consumer point of view, diesel cars are being purchased only due to their reduced running costs and improved fuel economy. Buyers are ignoring the high service costs as well as the high initial cost of a diesel car as they feel the lower price of diesel will compensate for the high initial investment. Owners of diesel cars will end up paying a heavy price of the luxury tax on diesel is enforced.
There is no questioning the fact that most diesel is now being used by passenger vehicles. But this tax is unlikely to put a check on inflation. This tax will also decrease car sales which have already been slowed down by increased interest rates and fuel prices. Although there are some luxury car models that are powered by diesel, most diesel cars are mid level models used by the Indian middle class.
If Mr Mukherjee is keen to enforce a luxury tax on diesel sold to passenger cars, he must consider the above facts before taking any concrete steps in this direction.
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