Buying a large car may be an aspirational impulse, but it?s not without its externalities, given the cost of fuel. That?s the prism from which to view the government?s decision last week to levy an additional specific excise duty of Rs 15,000 per unit on large cars, multi-utility vehicles (MUVs) and sports utility vehicles (SUVs) with engines between 1,500cc and 1,999cc. The duty has been raised by Rs 20,000 per piece for vehicles larger than 2,000cc. This is an eminently sensible decision. Given fuel costs, users of large vehicles?large vehicles consume more fuel per kilometer?should pay. The petrol, and occasionally diesel, that powers these large cars is currently being subsidised by the government. The administered prices for petrol and diesel are below market rates to the tune of some Rs 15-20 a litre. In such a scenario, government policy must try to disincentivise the consumption of petroleum products to reduce the overall subsidy burden.
There are other good reasons to raise taxes on large cars as well. For one, it is only the rich who can afford cars in these segments and it is reasonable to ask them to pay more, especially since they are paying the same as everyone else for the fuel which powers these gas guzzlers. Second, there is a need to curb the overall demand for petroleum products around the world. The current spike in global oil prices is largely because of an imbalance between excess demand and limited supply capacity. Unless demand comes down to manageable levels, prices will continue to remain high. This has greater potential for long-term economic harm than a short-term squeeze on consumption. Evidence from the US, where fuel is not subsidised by the government, suggests that people have begun to reduce their use of MUVs and SUVs and that the secondary market for MUVs and SUVs has completely collapsed. It is too much to expect the government in India to raise fuel prices to market rates. Therefore, it makes sense to use other methods like raising excise duties on cars to curb consumption and demand. By targeting large cars rather than small ones the government is also ensuring that the move is politically feasible and does not affect the middle class. Consumers of large cars, should they continue buying them as enthusiastically as before, should view the new tax as a justified add-on expense.