Shares of oil marketing and automobile companies took a significant hit on Tuesday following Union Road Transport and Highways Minister Nitin Gadkari’s proposal to introduce an additional 10% Goods and Services Tax (GST) on diesel vehicles. This move, aimed at reducing emissions, caused immediate ripples across the stock market.
Clarification from Gadkari
In response to the market’s reaction, Gadkari quickly issued a clarification, stating that there was no formal proposal under government consideration for such a tax. Speaking at the annual convention of the Society of Indian Automobile Manufacturers (SIAM), he mentioned, “I am requesting the Finance Minister to impose an additional 10% GST on diesel engines/vehicles. This is the only way to phase out diesel vehicles.” Gadkari emphasized the urgent need to address rising pollution levels, which he cited as a significant health concern, and suggested higher taxes to deter the purchase of diesel vehicles.
Market Impact
The announcement had an immediate impact on the stock market. Shares of Hindustan Petroleum dropped by 5.3%, Bharat Petroleum by 4.11%, and Indian Oil by 3.78% on the Bombay Stock Exchange. The automotive sector also saw declines: Ashok Leyland fell 2.68%, Tata Motors 2.19%, Eicher Motors 1.85%, Mahindra & Mahindra 1.55%, and TVS Motor 1.17%. Consequently, the BSE Auto index fell by 1.77%, closing at 36,406.77.
Government’s Stance on Cleaner Fuels
Gadkari took to social media to clarify, “It is essential to clarify that there is no such proposal currently under active consideration by the government. In line with our commitments to achieve Carbon Net Zero by 2070 and to reduce air pollution levels caused by hazardous fuels like diesel, as well as the rapid growth in automobile sales, it is imperative to actively embrace cleaner and greener alternative fuels. These fuels should be import substitutes, cost-effective, indigenous, and pollution-free.”
During his address, Gadkari highlighted the rapid growth of the auto industry, which is expanding at an annual rate of 15-18%. He urged the industry to move away from fossil fuels like petrol and diesel and adopt alternatives such as biofuels, ethanol, green hydrogen, and electric vehicles. He noted that India’s heavy reliance on fossil fuels in the transport sector poses significant economic and environmental challenges.
Current Tax Structure and Future Recommendations
Presently, automobiles are subjected to a 28% GST, with an additional cess ranging from 1% to 22%, depending on the vehicle type. SUVs face the highest tax, with 28% GST and 22% cess.
In May, a government panel recommended a ban on diesel-powered four-wheelers by 2027, advocating a shift to electric and gas-fueled vehicles. The panel also suggested that, by 2030, all new city buses should be electric, and no diesel buses should be added for city transport starting in 2024.
Gadkari’s call for higher taxes on diesel vehicles underscores the government’s commitment to reducing pollution and promoting sustainable, eco-friendly alternatives. The swift market reaction highlights the economic sensitivity and potential implications of such policy shifts on various industries.