Clicky

badge

Sunday, March 04, 2012

Diesel car dilemma- buy or wait?

Post Budget Update: There was no Diesel car specific tax in 2012 Union Budget...But car prices are set to increase by 2-4% as existing taxes have been increased and even tax on steel is increased

----------------------Original Post-------------------------------------

Ever since the Govt of India's planned move of introducing an additional tax on diesel cars, in order to discourage usage of subsidized fuel, prospective car buyers are seen advancing their purchase decisions, so as to buy ahead of budget and save the extra taxes.

Should you hurry and buy a diesel car now? What happens if extra duty on diesel cars are introduced? What are the options? Here's my take on it.

Why Govt is mulling a diesel tax?
Govt has put lot of taxes on petrol and now petrol is close to 2 times as expensive as diesel. Naturally this has fueled the usage of another fuel- diesel. Earlier diesel was used predominantly by trucks and buses. Diesel cars were very few. The huge price difference has fueled demand for diesel cars, so almost every car maker has introduced diesel option in all segments- small car, sedan, SUV and so on. Thus diesel consumption has shot up, increasing govt burden on subsidy. To compensate this, Govt plans to levy an up front amount on diesel cars.

We don't know how determined the govt is on this, but car makers are making hay when sun shines, as usual. Scaring prospects that prices will shoot up after budget, dealers are taking as much booking as possible. As a result, February sales numbers have been very encouraging.

Will diesel tax be levied really?
We don't know. Unless some one like Nira Radia gives us some inside info, our only source of confirmation will be when the budget is presented.

How much will be the additional tax for diesel cars?
Yet to be known. But the guesses going around put it at 10% of vehicle cost. That would mean an additional spend of anything between 40k to 2 lakhs or more (since most of the cars priced between 4 lakhs to 20 lakhs)

What Car makers can do if such a levy is imposed?
So far, car makers have been charging a premium on diesel cars. Though difference in production cost of a diesel car vs petrol is not huge, diesel variants are sold at a premium. This is because number of diesel units were less compared to petrol (so per car cost is higher) and car manufacturers have decided to make higher profits off diesel units, since consumers wouldn't mind paying premium.

Now that diesel is selling at par (or more) compared to petrol, it is time to shed that premium pricing. High volume means less per unit cost. Also diesel units get sold without much marketing and sales effort. Because of these factors, car makers can afford to absorb a part of this tax.

Some car makers rely heavily on diesel. Mahindra & Mahindra's portfolio is full of diesel, excluding few variants of Verito. Similarly Tata motors also has a strong diesel line up. These two power houses might lobby against the diesel tax. Other manufacturers are likely to join hands, since they also stand to lose and long term capital investments in diesel might suffer a set back.

Set back for sales, if any are only likely to be temporary.

What can you as consumer do if diesel tax is introduced?
Option 1: Wait for sometime, to see if Govt succumbs to pressure and does a full or partial rollback

Option 2: See if you can delay the car purchase decision by an year or two. Car is a depreciating asset. Savings on insurance, maintenance, depreciation cost etc will make up for the extra thousands.

Option 3: Do a cost benefit analysis to see if it still makes sense to go for diesel. For example, if you'd to pay a diesel tax of Rs 80,000, it means about 1900 litres of diesel at today's price or about 25k kms assuming an average of 13 kmpl. To travel 25,000 kms in a petrol car, you'd spend  INR 1.4 lakhs at today's price. Effectively you'd need to drive for about 30k kms to make up for the extra amount. Of course this is an illustration and you can work out the feasibility with real numbers when you buy.

Option 4: See if you can lease a car instead of buying. Merc and BMW offer their cars on lease, instead of outright ownership. This concept has some benefits- see if that fits you. Unfortunately lease option is not viable for cheaper cars in India. I was discussing with a Tata Motors officials on this- He said that while Tata motors had a lease like option ready to roll out, it was withdrawn due to risk factors- recovering money in case of damage to car, chances of customers eloping with car at the end of lease period etc

Option 5: Curse the government, cough up the extra amount and drive as usual (Guess this is what most of us would do eventually). Drive more and burn more diesel to break even faster or to take revenge on government :)

What happens if the Govt doesn't impose any tax?

  • Those who bought a diesel car in a hurry may regret their hurried purchase and will miss out on a chance to show off how smart they were, to buy one before new rules came in
  • Car makers will continue as if nothing has happened. They'll probably save this diesel tax ghost for next year
  • Demand for diesel cars and diesel fuel will continue to rise
What alternate options Govt has instead of diesel tax?
Differential pricing for fuel doesn't look feasible in India. Below two can be tried
  • Promote CNG in more cities
  • Promote hybrid and electric vehicles
Questions to be answered
  • Will it be applicable to commercial vehicles also? (Taxi registration- yellow board) What mistake they've done? They've been using diesel all along. Any increase will be eventually passed on to common man who hires these commercial vehicles
  • Is it applicable to second hand vehicle also?
  • By charging extra upfront, isn't the government sending a message: "Pay this amount and drive as much as you want."?
  • Instead of doing all this circus to reduce consumption of diesel, why not make petrol more affordable?
  • Since the diesel tax amount is being collected to fund subsidy, should this amount be exempted from income tax (like section 80C donation) ?

3 comments :

Used Cars For Sale said...

Thank you so much for providing such a information. It has a big help for me. Hope to see more info updated.I must bookmark this post!
I love diesel car.

magiceye said...

i like your last suggestion for it relief

Shrinidhi Hande said...

Deepak: :) Luckily there was no such tax proposed in Union Budget