Additional tax on diesel vehicles overtook all other industry issues at the annual general meeting of the Society of Indian Automobile Manufacturers (Siam) here on Tuesday. Road Transport and Highways Minister Nitin Gadkari set the tone of the event by stating that the automobile industry must reduce production of high carbon-emitting diesel vehicles. All hell broke loose with the next part of the minister’s sentence--the government may consider imposing an additional 10 per cent goods and services tax (GST) on such vehicles if their production doesn’t come down. As major auto stocks tumbled reacting to the tax warning, Gadkari clarified that there is no such proposal currently under the government’s consideration.
The auto stocks remained in the red despite his clarification. The BSE Auto index, which slipped 3 per cent intraday on Tuesday, ended 1.8 per cent lower. Tata Motors, Mahindra & Mahindra and Ashok Leyland fell 2.19 per cent, 1.55 per cent and 2.68 per cent, respectively.
This is what Gadkari had to say early on Tuesday: “The country’s fossil fuel imports are rising and if this keeps going on this way, the people will suffer due to pollution. Therefore, you (the auto industry) need to move away from diesel and petrol. I request you to do so. I hope you do it on your own… Otherwise, whether it is generator sets or any other thing running on a diesel engine, I would request the finance minister to impose 10 per cent additional GST on all such things.”
Automobiles are subjected to a 28 per cent GST, coupled with an extra levy ranging from 1 per cent to 22 per cent, depending on the vehicle's category. Sports utility vehicles (SUV) carry the highest GST rate of 28 per cent, accompanied by a substantial compensation cess of 22 per cent.
After his statement created a flutter in the auto industry and the stock market, Gadkari on X posted: “It is essential to clarify that there is no such proposal currently under active consideration by the government. In line with our commitments to achieve Carbon Net Zero by 2070 and to reduce air pollution levels caused by hazardous fuels like diesel, as well as the rapid growth in automobile sales, it is imperative to actively embrace cleaner and greener alternative fuels.”
While India’s biggest carmaker Maruti Suzuki noted that it stopped selling diesel vehicles in 2020, Hyundai Motor said now only four of its 13 models in the country have a diesel option. Mercedes-Benz India, the largest luxury carmaker in the country, said diesel-run vehicles are already about 15 per cent more expensive than petrol-run vehicles. Toyota Kirloskar Motor said the industry has to move away from fossil fuels.
Earlier in May, an oil ministry committee's report suggested that India should phase out the usage of diesel-powered four-wheelers by 2027 in favour of electric and gas-fuelled vehicles, especially in cities with populations exceeding one million and in polluted towns, as a measure to reduce emissions. No action has been taken on this report, so far.
In his speech at the Sian event, Gadkari said: “We will have to increase tax if you do not reduce the production of diesel-run vehicles... Diesel is a very hazardous fuel and we import it in a huge amount. I have been after the people who build (diesel-run) generator sets but I have not been able to do much.”
He said that the auto industry needs to say goodbye to diesel-run vehicles in whatever way possible. "I am requesting you extremely politely. Otherwise, we will continue to increase tax to that level that you will find it difficult to sell diesel-run vehicles."
Pollution is a major problem and it is affecting this country's health, he mentioned. "I have prepared a letter for the past 8-10 days. Today, at 5.30 pm, the Finance Minister is going to come to my home for a meeting. I am going to request that she impose an additional 10 per cent GST on anything that is being run on a diesel engine. This will quicken the transformation otherwise people right now are not in a mood to listen...I request you to urgently diversify yourself," he said.
In his speech, the minister “requested” the auto industry again to “take action on its own” and give Indians relief from diesel-run and petrol-run engine vehicles as soon as possible.
"When I was a kid, I used to be afraid of swimming. I was standing near the water, so my teacher came and just pushed me. The day when he pushed me, I learnt how to swim. So, I think my job is to push you and I know that you (auto industry) are very good swimmers and you will win awards once you are in the water," he further said.
In 2014, the share of diesel-run vehicles in total passenger vehicles (PVs) in India was 53 per cent. In 2023, this share has come down to 18 per cent. "This is a very good sign," the minister noted.
Industry reacts positively
Mahindra & Mahindra, Kia India, Toyota Kirloskar Motor, Hyundai Motor India, and Tata Motors are the top players in the Indian diesel passenger vehicle market.
Hyundai Motor India Chief Operating Officer Tarun Garg said a diesel option is now for less than a third of the company’s portfolio. Around four years ago, 95 per cent of its India portfolio had a diesel option. “Volume wise only 18 per cent of our volumes come from diesel variants," Garg said. He noted that the share of diesel-run vehicles in the company's total sales was about 30 per cent in 2019-20. Hyundai is India’s second-largest carmaker.
Rahul Bharti, executive officer (corporate affairs), Maruti Suzuki India, told Business Standard: “Fortunately, we took that decision back in 2020, so this (government’s push to phase out diesel vehicles) does not affect us.”
Vikram Gulati, Toyota Kirloskar Motor's country head and senior vice-president of corporate affairs, said: “We should understand the real message from the minister”. "The real message was about shifting towards sustainable fuels. These fuels have to be sustainable from the point of view of environment as well as the Indian economy," Gulati noted. He said that the ultimate goal is carbon neutrality and multiple technologies will be needed to achieve that.
“We are very much in agreement with the government that as a country, we have to shift away from fossil fuels as fast as possible and at scale,” Gulati further said.
Santosh Iyer, CEO, Mercedes-Benz India, told Business Standard: “The consumers prefer diesel-run vehicles because of the driving experience with the engine that can produce a higher amount of torque. Maybe, these consumers will shift to electric vehicles instead of other gasoline-run vehicles."
He said that the German carmaker is taking the minister's statement as a policy direction towards alternative fuels. The share of petrol-run and diesel-run vehicles in Mercedes-Benz India's total sales is 50:50.
Petrol-run sedans comprise 70 per cent of total sedan sales of Mercedes-Benz India; the share of petrol-run SUVs in total SUV sales of the German carmaker is just 30 per cent.
“If the tax changes, the consumer preference may change. Even today, there is a 10-15 per cent premium on diesel. This will become 25 per cent if what he said is true. Then, you have to wait and see how the consumer preference changes," Iyer noted.
He added that Mercedes-Benz India is “not concerned” because it has all types of vehicles in its portfolio. “From A-class to S-class, we have petrol-run and diesel variants for every car. Even if the consumer preference shifts, we just need 6-8 months to change our production plan. Even our petrol cars are E20 compatible,” he added.