It could soon be a tough road ahead for vehicles with low fuel efficiency. The Government is considering a proposal to introduce a new tax on such vehicles to ensure that they are phased out. This tax could be a deterrent against manufacture of fuel-guzzling vehicles. The proposal simultaneously suggests a ban on vehicles older than 15 years as they cause greater pollution. Besides, States could be given incentives to impose such taxes, while those not falling in line might be penalised.


These carrot-and-stick suggestions – aimed at helping India to take a leadership position in climate change mitigation efforts – are among the proposals put forward by the Finance Ministry’s Department of Economic Affairs (DEA). The DEA paper, authored by Mr H.A. C. Prasad and Mr J.S. Kochher of DEA, is now before the 13th Finance Commission, official sources told Business Line. The DEA study has suggested that a uniformly high tax should be imposed on fuel inefficient vehicles, adding that “such tax should be progressively lowered with increase in fuel efficiency.” While the contours of the tax are still being worked out, possibilities include a higher upfront road tax on purchase of a fuel guzzlers or a higher registration tax on such vehicles, sources said.

Currently large cars pay a higher road tax and excise duties than smaller cars. Industry sources said the Government had introduced a differential excise duty based on fuel efficiency of vehicles in the mid-1980s, but it was taken off due to practical difficulties. They said some developed countries have a tax on vehicles based on their carbon dioxide emissions and penalties for going above the emission limits. There are also efforts at the international level to harmonise norms on vehicles. The suggestion to disincentives fuel inefficient vehicles comes in the wake of a comprehensive efficiency labeling programme that is currently in the works.

The Bureau of Energy Efficiency (BEE) has begun work on the fuel efficiency labeling mechanism, under which vehicles will be assigned star-rating according to their respective fuel efficiency levels. A similar programme of star-ratings is currently being followed for labeling energy saving efficiency in white goods such as refrigerators and air conditioners. The BEE and the Petroleum Conservation Research Association are looking at trends driving fuel economy programmes globally. The stars will be awarded to four-wheel passenger vehicles based on fuel economy data that will be obtained by standardised tests conducted for emissions testing.


States could be given grants for taking measures that would encourage people to shift to public transport and reduce their dependence on private transport. There would also be rewards for promoting businesses that manufacture environment friendly vehicles. The DEA study suggests that additional resources should be given to states which acquire low carbon technologies through foreign collaborations or in-house R&D.

Among other incentives to States, the study said grants should be given to States that go in for grid-connected centralised power generation through solar photovoltaics and utilising energy present in municipal solid waste. Additional resources could be given to states for use of sustainable production and consumption practices such as recycling and reuse of materials, promoting healthier diets and sustainable construction materials and home design, as well as shifting to efficient mass transport and bio-degradable packaging.

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September 2021