Car makers warn diesel tax will hurt industry

The 'Ritz' car stands on a display during its launch in New Delhi May 15, 2009.

NEW DELHI/MUMBAI (Reuters) - Major auto makers in India warned on Wednesday that government proposals to raise the tax on cars running on heavily subsidised diesel will hurt a fast-growing sector popular with India's emerging middle class.

Demand for diesel-powered vehicles has surged, accounting for more than 40 percent of new car sales in India in the year to March 2012 or double their share in the previous year.

Almost all of the large, expensive SUVs and jeeps bought by the newly wealthy are powered by diesel, as are many of the luxury saloons sold by Audi or BMW.

But the government is under pressure to attract more foreign investment by reining in spending, especially on fuel and fertiliser subsidies.

Growing diesel consumption is a major headache for a country grappling with ballooning budget and current account deficits and which imports more than 80 percent of its fuel needs.

REWORKED PLAN

The tax plan, a new version of an earlier proposal, follows a government decision to back off from a more ambitious and unpopular scheme to raise the price of diesel and kerosene, which is used mainly by the poor and in transport vehicles.

The oil ministry proposal has not said by how much the tax will increase. Automobile manufacturers successfully lobbied against a 2010 proposal for an 80,000-rupee charge.

Executives from Tata Motors, Maruti Suzuki, Mahindra & Mahindra (MAHM.NS) and Ford argued against increasing the excise duty on diesel vehicles at a meeting with finance ministry officials on Wednesday.

"We as an industry made it very clear to the finance ministry that any proposal to tax diesel vehicles ... would have a negative impact on the industry as a whole at an already difficult time," Michael Boneham, president and managing director of Ford India, told Reuters.

The Society of Indian Automobile Manufacturers (SIAM), an industry lobby group, estimates that diesel vehicles consume less than 7 percent of the fuel's sales in India, but the government puts the figure closer to 15 percent.

The government has increased the price of petrol while diesel has remained frozen since July 2011. At 40.91 rupees per litre in New Delhi, diesel is 43 percent cheaper than petrol.

PROJECTS

In the past week, the government has unveiled measures to limit spending, speed up major infrastructure projects and auction a higher number of slots in a sale of second generation (2G) radio waves.

Economists and investors have expressed scepticism at a number of the measures, including the diesel tax proposal, saying it is unclear how they will be implemented and what impact they will have on the economy.

(Reporting by Manoj Kumar and Arup Roychoudhury in NEW DELHI and Henry Foy in MUMBAI; Writing by Ross Colvin; Editing by David Cowell)