Thursday, November 29, 2012


Merely taxing diesel vehicles can backfire!

The debate on subsidy on diesel price never seems to reach a consensus. On one hand, diesel subsidies are important to keep food prices and transport prices under check, while on the other hand, this subsidy is being exploited by luxury car owners and owners of commercial hubs. In simple words, tax paid by the aam adami which is meant for societal development is latently being directed as subsidies to industrialists and rich business houses! Thus it becomes far more important for the government to either come up with a differential pricing system or some other model which categorises these two different set of users under two different price bands.

In the same light, the Supreme Court has recently floated a proposal to impose “a green tax on new and existing private diesel vehicles to check pollution in the National Capital Region.” The bench proposed to tax diesel vehicles with a green tax that would be 25 per cent of the cost of the vehicle. This is to make sure that the subsidy being offered in form of lower diesel prices comes back to the government. The initiative looks quite promising but then there are lots of misses between the cup and the lip. These taxes may later increase the sale of second hand diesel vehicles (which is more polluting) and may deter the sale of new diesel cars.

Contrarily, green taxes are a globally practiced method of encouraging green-vehicles and not the other way around. A report by Professor Robert N Stavins of Harvard Kennedy School published by Harvard University states that such initiatives can accrue ‘double dividend’ as it will discourage non-green vehicles and also would be a source of new revenue for the government. However, merely collecting taxes and fines won’t solve the purpose. There needs to be a system of using the collected amount in more judicious manner, especially towards refurbishment of traffic and transport structure. As per Media report published in November 2012, Pune despite of collecting Rs 4 crore (out of polluting vehicles in form of green taxes) failed to utilise the money for any purpose, leave aside using the same for pollution control. Nagpur is another example wherein they raked in Rs 1.30 crore but again didn't use the money for any pollution control measures. The same is true for cities across the nation.

Almost all countries across the world are tweaking with their green taxes with an objective of eliminating polluting vehicles in next couple of decades. Sweden is all set to increase taxes by almost 35 per cent on polluting cars while exempt taxes on electric vehicles to push green-electric vehicles on the road. Similar measures are being adopted by other EU nations including Germany that went steps ahead in implementing taxes that would encourage the manufacturers to design greener cars! Similar systems are also present in UK, US and Australia.

The proposal suggested by the Supreme Court should, along with taxing polluting vehicles, have provision of floating market with affordable electric and hybrid cars and cars running on gases. This multi-dimensional policy would serve dual purpose of both preventing misallocation of diesel subsidy and enhancing pollution control measures. The Supreme Court recent decision should also keep in consideration the cost of manufacturing diesel vehicles. Given the fact that diesel vehicles are relatively expensive than their petrol counterparts, such taxes can further dent the automobile market. The Supreme Court and the policy makers should include clause that provides incentive to green vehicles manufactures and dealers. Let this policy be not a half-backed and self-destructive one!


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