Wednesday, September 16, 2009

Vehicle taxation policy

The increase in taxation on vehicles comes as no surprise. It is about time some drastic measures are taken to either limit the number of vehicles plying on the roads or increase the road network.

It is important to first understand that basic vehicles in this era is a utility and not a luxury. It is also important to consider the fact that although major towns like Thimphu and Phuntsholing are getting over crowded with vehicles, vehicles are still a rare sight in other areas in the country.

If the examples in other countries are anything to go by, a 15% to 20% will not at all effect the purchase of vehicles. It might cause a temporary reduction in consumption, after a short while when the increase in taxes is seen as inevitable, the consumption will come back to normal. This is light of the observation that taxation as high as 50% have failed to curtail demand on cars. This could be because vehicles are seen as a necessity especially when there are no reliable public transportation system.

The positive aspect of this increase in taxes might be increase in revenues for the government.

The increase in taxation being proposed is sensible enough to protect public transport and power tillers. However, it forgets the basics of taxation. Tax should be minimal on utility goods while it should be as high as possible for luxury goods. The proposed tax increase doesn't address that fact that some families own more than one car, especially the richer folks. A husband and a wife should be allowed only one car at the nominal tax as it is a necessity. The second car in the family should be subject to luxury tax.

The proposed taxation system does not differentiate between small cars and large cars. This gives a sense that the tax policy has elitist elements to it. Smaller cars are more fuel efficient and therefore will demand lesser fuel. Fuel is one of the highest consumer of Indian Rupee reserves. Small cars require lesser space too.

The large number of huge luxury cars on the road are mainly due to the tax exemption provided by the Government to the civil servants. To reduce the number of large luxury cars which have high fuel consumption, it might be advisable to do away with the tax exemption certificates to the civil servants. This is more so, because the civil servants and the corporate employees now have almost same salaries.

It is important to have a holistic and systemic perspective to change in taxation policies to ensure stable tax system. We would not like to see a change in tax policy today because of increase in number of cars, and a tax change policy tomorrow because the country is spending a major portion of rupee reserves on fuel or to accommodate more fuel efficient and environmentally friendly cars.

A committee consisting of members both from MoIC, Revenue and Customs, other stake holders would perhaps come out with a more holistic change in the vehicle taxation policy.