India desperately needs a uniform road tax on cars sold in the country. China and India are the only two sizeable growth markets for automobiles in the world, significant for any global manufacturer in the long term. India offers the added advantage of being a testing ground for a global shift towards smaller, fuel-efficient and low-emission cars.
This also brightens the prospects of the country emerging as a hub for manufacturing small cars. Already automobile companies in India led by Suzuki and Hyundai are exporting one in four cars they produce and the expectation is the scale could rise to a million cars by 2015 when domestic sales touch 3 million. The Indian automobile industry has geared up into a phase of heightened competition with entrenched incumbents like Suzuki — which sells every second car in India — girding up not merely against the Toyotas and Volkswagens that bring to the market a pipeline of proprietary technology but also against companies like the Tatas and the Mahindras that have an innate understanding of the Indian value proposition. Then again, it’s bound to get crowded in a market that should double its size in five years.
All this makes a compelling case for the Indian automobile market not to be fragmented by differential road tax rates. The rates swing wildly between a mild 2% and a prodigious 18%. A similar variance obtains for cars imported into different parts of the country.
The suggestion to impose a lumpsum lifetime tax of 6% on all cars sold in India, endorsed by the majority of states, removes a glaring geographical discrepancy in the treatment of Indian consumers. It also addresses a factor limiting inter-state movement as more Indians hit the road in their own cars. The move to tax cabs at the same rate ought to curb the rising menace of personal vehicles being illegally used as taxis. Finally, by bringing uniformity in road tax, future attempts to decongest our inner cities will become easier if there is scope for imposing punitive imposts in select urban areas or on some categories of cars. Unless unified, the road tax cannot serve as an efficient green tax.
This could be a predecessor to a far more ambitious countrywide goods and service tax, which is being negotiated between the Centre and the states. The levy that will make India a common market will also take away the discretion of states accustomed to half a century of tax arbitrage. Expectedly, the uniform tax has repeatedly overshot deadlines despite generous promises of bounty by the Centre if they make the switch. States are yet to decide for themselves a revenue-neutral rate that the Centre has wisely refrained from recommending.
This for a self-policing tax that could knock 1.22-2.53% off retail prices nationwide and bump up economic growth by 1.5 percentage points a year. However, take heart. In finance minister Pranab Mukherjee the Centre has an eminently capable interlocutor to get the uniform tax off the ground.