Union minister Nitin Gadkari caused a stir in the automotive industry recently by warning manufacturers about reducing diesel car production or potentially facing an additional Goods and Services Tax (GST). However, he has since clarified that there are no plans to introduce further taxes on diesel vehicles.
In a recent interview with CNBC-TV18, Gadkari emphasized, "I am not against diesel, and neither are we going to levy any new tax on diesel vehicles."
Despite these clarifications, his initial statement at the Society of Indian Automobile Manufacturers (SIAM) annual conference in New Delhi raised concerns among some of India's largest car manufacturers.
During the conference, Gadkari was quoted as saying, "Say bye to diesel soon, otherwise we will increase so much tax that it will become difficult for you to sell these vehicles."
Initially, he had suggested proposing a 10 per cent additional GST on diesel vehicles to address pollution-related issues. This would have been in addition to the existing 28 per cent GST on automobiles, along with an extra cess ranging from 1-22 per cent, depending on the vehicle type and engine capacity.
Gadkari explained, "I was saying it in the spirit that if you don't take it seriously, then the government will have to impose a pollution tax on diesel fuel. So before that, you (automakers) have to change your policy."
While Gadkari has clarified that no additional taxes will be imposed on diesel vehicles, such a move would have a significant impact on major car manufacturers in India.
India boasts the world's largest automotive market after China and the United States and is home to prominent domestic and international players, including Maruti Suzuki, Tata Motors, Mahindra and Mahindra, Mercedes, Volkswagen, Hyundai, and more.
If diesel cars were to become more expensive in India, it would notably affect the sales of several companies.
Petrol cars have been the preferred choice among Indian buyers, and diesel car sales have been steadily declining. However, the luxury car segment presents a different picture.
Diesel variants in this segment have seen their market share rise to 33 per cent in 2023, up from 31 per cent in 2021.
Consequently, luxury car manufacturers would be adversely affected if extra taxes were imposed on diesel vehicle sales. Mercedes-Benz, for instance, expressed concerns to Reuters, stating that any alteration in the taxation structure regarding diesel vehicles would impact their fuel mix portfolio.
Santosh Iyer, Managing Director for Mercedes-Benz India, explained, "We will need approximately six months to adjust our production planning processes, but we can always adapt and shift based on demand."
Moreover, many private taxis, utility vehicles, and trucks in India predominantly run on diesel due to its fuel efficiency.
Therefore, increased taxes could dampen the demand for such vehicles, potentially affecting the overall sales volumes of automakers engaged in manufacturing commercial vehicles, trucks, and other utility vehicles.
Among automakers, Mahindra and Mahindra (M&M) hold the highest market share in diesel car sales, with 47 per cent unit sales so far this year, up from 28 per cent in 2021, according to data from global automotive market research company Jato Dynamics.
Hyundai follows in second position with a 15.4 per cent share of diesel vehicle sales, while Kia holds third place with 12.7 per cent.
While most of the automakers operating in the country have disclosed their plans to increase production of environment-friendly electric vehicles (EVs), there is still a long way to go.
It may be noted that EVs accounted for just 2.4 per cent of car sales in the January-July period; the government wants them to reach 30 per cent by 2030.
Tata Motors is currently the leader of India's nascent EV market, while major player Tesla is actively holding discussions with the government to enter the Indian market.
