December 18, 2011

Private diesel vehicle sales should be taxed

The crux of my argument is that the diesel used for private purposes is not meant to be subsidized and such usage should be charged/taxed appropriately. 

The diesel price in India can be broken up into simple components. The retail diesel price = (actual cost of diesel) + (Central & State Govt. taxes) - (Subsidy by Central Govt.)

Economists would call it inefficient because the taxes and subsidy provided by the government neutralize each other a bit. The benefit is that the government does not let the local diesel price reflect the volatility of international prices.

The beneficiaries of subsidized diesel include farmers using tractors for agriculture, truckers who transport foodgrains and materials all over the country, public transport buses that transport millions across the country, and many others. But, the list also includes the owner of a diesel car/SUV for private use.
Make no mistake, a private vehicle is an item of convenience. In other words, a person owns a private vehicle (petrol or diesel) to avoid travelling by public transport. Absolutely nothing wrong with that, until the diesel vehicle owner expects the government to subsidize him for it.

It is quite shocking to see how many private diesel vehicle owners believe that subsidized diesel is their birth-right. Clearly, the subsidy is not meant for this category of diesel users. Since they pay the tax component of the diesel price, they claim that it is the government's obligation to subsidize them for their diesel joyride. But, they forget that the tax is paid even by the intended user of the subsidized diesel. On the other hand, there should be a mechanism to charge the private diesel vehicle owners for using subsidized diesel. 

Ideally, local diesel prices should be deregulated and reflect the international oil prices. This would even promote conservatism among the citizens and more efficient use of the fuel. But doing so in one sweeping move could prove catastrophic for the national economy. 

So, if diesel subsidy has to be maintained (and reduced gradually) it has to co-exist with a mechanism of charging the unintended benfactors of subsidized diesel. Possible approaches could include differential pricing of diesel (which could lead to black-marketeering), an annual tax on private diesel vehicle owners (which would be tough to implement efficiently) or a one-time tax on private diesel vehicle sales (could result in a dramatic reduction in sales of private diesel vehicles). A one-time tax on private diesel vehicle sales seems to be the easiest to implement efficiently. Such a tax could increase the revenues of our government which could be in-turn used to subsidize the fuel. Hopefully, this would also lead to the government reducing some of the taxes on diesel and in-turn its retail price.

The flip-side is that private diesel vehicle sales could drop dramatically from current levels. And people would go back to choosing a petrol or diesel vehicle based on parameters like performance, fuel-efficiency and the average kilometres they would clock in a week. Till we move to an ideal solution (which arguably might never happen), taxing private diesel vehicle sales seems to be the only way charge them for using subsidized diesel.

Do you see any other mechanism to implement such a charge? Then I would love to hear it.

Disclaimer: I maintain this opinion in spite of having a diesel vehicle in the family.

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