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The Import Duty On Hybrid Car? Give Me A (Tax) Break!!

A June 18, 2008 announcement from Honda made headlines in Indian media. Honda was announcing the first hybrid car for Indian market. In India the petrochemical fuel story is saga of pain and nightmares. So Indian car customers dreamed of a ray of hope.

Alas, the price tag for Honda Hybrid was going to be around 21.5 lakh rupees (Rs 2.15 million) . To put the figure in perspective, that is the price of an old, one bedroom apartment in one of the far away suburbs in Mumbai, or that is the annual salary of one very high ranking manager in corporate world. So in USA, it is equivalent to around $150,000.

What is strange is more than half of this price is the import duty on the car. If there was no import duty, and the car was allowed to be sold at the same price as in Japan, it would cost around Rs 10 lakhs (Rs. 1 million).

This is because of our age old protectionist tariff structure that heavily favors Indian companies over their foreign counterparts. Perhaps this has some advantages in the areas where Indian companies have competitive products to offer. But what such a product is needed badly and no Indian company is offering one?

No Indian company so far has made a hybrid vehicle. And take into account the fact that hydrocarbon imports are currently the biggest drain on Indian foreign exchange, even dwarfing the defense expenditure. If India were not importing crude oil, we would be saving several billions of Dollars annually.

A hybrid car works on the principle of energy regeneration. In non hybrid car, when the driver applies brakes, the energy of the car in motion is wasted. In hybrid car, this energy is converted into electrical power and used back again to accelerate the car. Honda press announcement claims that this Honda Siel hybrid was 47% more efficient than its equivalent model (Civic) sold currently.

If Honda Siel hybrid were to replace on car in its category, let us see how much it could save.

The type of driving this car is designed for, stop and go type city driving, is the perfect fit for city driving in India. So we we can safely assume that it should be possible to realize all this 47% saving.

Typical life of a Honda Civic car in USA is 200,000 miles, so 300,000 km. In reality, people in India use cars for a lot longer than that. But for the time being, let us assume that this is the distance the car will travel in its lifetime.

Now a typical Honda Civic in India gives 11 km/lit. A 47% efficiency gain would amount to 16.17 km/lit. So that means to travel 300,000 km, the old Civic will consume 27272 lit petrol and the new hybrid will consume only 18552 lit. That is saving of 8720 lit petrol.

At the rate of Rs 55/lit, that amounts to saving of 4,79,600 Rs. of saving. Now considering petrol is subsidized in India, and the real cost is about Rs.10 higher for oil companies, this is saving of about 5,66,800 Rs. of total petrol and saving of about Rs 87000 subsidies for government.

For petrol, the biggest component of the price is the crude oil import tag. Typically this ranges from 60 to 75% of the petrol price. Assuming the lower limit 60% crude oil tag, the cost of crude imports this could save is a whopping Rs 4,00,000 per imported hybrid car. Allow import if 1000 such cars and we just saved Rs. 40 crores (Or approx US$ 1 billion) over the lifetime of these cars. If the cars last longer than 300,000 km (which somehow they will, given it is India), these savings increase in direct proportion to that extra life.

Now this should make any government happy. This new car is going to save a chunk in crude imports and a sizable sum in subsidies. Government needs to allow tax brake for this car.

Instead we are charging 104% import duty.

We are short of fuel. We need anything that saves fuel. So using the policy tools in our hands, like income tax and import duties, we need to encourage the technologies that will help us and discourage the technologies that create problems for us.

This is the problem. Not corruption, not illiteracy, not population. Our systems, our laws, our regulations are not in line with our needs, our goals and our dreams. If we succeed , we succeed in spite of our systems , not because of our systems.

I must mention that one shining exception to this chronic problem is Reserve Bank of India. By controlling the reverse repo rates and by carefully managing the liquidity , Reserve Bank of India has helped a great deal to Indian economy. In the last decade Infosys and Wipro have shined worldwide while Reliance blazed the home turf. But their success could not have been maintained without careful maneuvering of Rupee exchange rate and still outsmarting inflation. If RBI had gone too much on one way, one side of business (import based or export based) would have suffered while other would have been forced to cope up with explosive, almost unhealthy growth.

RBI is fine. But what about other areas of policy making? If politicians are not doing, it are people taking it up to them? Are people asking right people right questions? Are we insisting on improvements?

It’s time to get hybrid car in India. But not trying to build one from scratch in India. Instead making the imports cheaper. Time to tell the government – When we buy hybrid, give us a (Tax) break.







3 Responses

  1. […] Eric J. Leech wrote an interesting post today onHere’s a quick excerptIn non hybrid car, when the driver applies brakes, the energy of the car in motion is wasted. In hybrid car, this energy is converted into electrical power and used back again to accelerate the car. Honda press announcement claims that … […]

  2. This is just step 1- to offer the product in the market. Step 2 is to lobby and get the break, unless some Indian auto major plays spoisport, but I predict that in the next years budget, it will go off…

  3. You are very right about the need of hybrid cars but wrong on loss to Government of India.

    Petroleum taxes are never transperent.THERE IS NO SUBSIDY ON ANYTHING.The way government calculate subsidy is differnce between (cost+taxes) and price.
    At $130/barrell crude,they are losing some somey as they did not increase petrol price due to election in site.
    When we say subsidy we should read less tax.Government of india collected Rs 2 lakh crore from petroleum taxes..Which have trippled in last 3 years.
    Taxes are calculated on price,so if petrol price rise by Rs 5 ,Government get Rs.3 and petroleum cos. only Rs.2.

    Taxes are as follows Excise(Central)+Sales(State)+Octroi(Municipal Corporation).

    These taxes consume more than 55-60% of the total price of petrol.

    Regarding foreign currency,India now has $300 Billion of forigh reserves and so in no shortage of dollars.

    Actually government of india does not want to lose its major source of revenue.

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