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Created: Wed Jul 30 10:14:50 2008
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CENTRE FOR SCIENCE AND ENVIRONMENT
Cities evolving fiscal measures to curb vehicular pollution
A fact sheet
1. Fiscal measures to control vehicular pollution
Several cities in India including Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, have
begun to take steps to implement fiscal measures to address the problem of air pollution and
congestion. Though still very nascent, this is a unique and a very important step forward to use
market based instrument to influence consumer behaviour and stimulate investments in pollution
control efforts and clean technologies. All big change cost a lot of money. Fiscal measures can
help to cushion the cost of transformation, -- improve fuels and technologies and influence people
to choose more sustainable travel options like public transport. These measures can also help to
generate revenue to fund pollution control and congestion reduction measures.
Though still very nascent these new policy initiatives have begun to take roots. These fiscal
measures can enable rapid introduction of clean fuels and technologies and create fiscal
incentives for public transport. The cities that have taken the lead in this regard include Delhi,
Tamil Nadu, Bangalore and Hyderabad. These cities have evolved different models of policy
framework that show wide variation in their structure and focus.
The key focus of the fiscal measures are clean fuels and technologies including CNG, LPG and
zero emissions technologies; disincentives for older vehicles; and creation of dedicated fund from
taxes on polluting fuels to pay for pollution control efforts.
However, it is important to note that so far cities have not implemented fiscal policies to promote
public transport usage and implementation. Even though the National Urban Transport Policy has
provided for such measures actual implementation at the city level is still tardy. This will require
urgent intervention.
2. Fiscal measures to promote clean technologies, and fuels and discourage old vehicles
Delhi
i. Air Ambience Fund to generate resources for pollution control
In the wake of strong public concerns over the rising numbers of diesel vehicles and
diesel related pollution in Delhi's ambient air, the Delhi government has finalized plans to
cut diesel emissions in the national capital region. To achieve this Delhi government has
announced a multi-pronged strategy in the month of January 2008. This strategy aims to
phase out in-use light duty diesel commercial vehicles, introduce pollution checks for
incoming diesel traffic from outside the city, and proposes to introduce Euro IV standards
in advance in the entire national capital region. An important component of this plan is
environment cess on diesel fuel.
The decision to impose `environment cess' on diesel fuel is the first ever step to apply
polluter pay principle and generate fund for pollution control. Air Ambience fee of 25
paise per litre on sale of diesel fuel has been already implemented on March 28, 2008.
The Delhi Pollution Control Committee (DPCC) administers and collects this cess. The
revenue collected through this cess is being used to create Air Ambience fund to meet
the cost of Delhi's clean air action plan.
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Air Ambience Fund has been created by the Finance department vide their office
memorandum number dated March 27, 2008. Air Ambience Fund account has been
opened in the DPCC and about Rs. 10 crore has been collected. DPCC administers and
collects this cess.
Normally, cess is imposed by the Central government under the Finance Act to raise
funds for special purpose. To be able to implement this cess Delhi government has taken
the lead to exercise the power that has been conferred on the state boards Delhi
Pollution Control Committee under section 31 (A) section 17 (1) of the Air (Prevention
and Control of Pollution), Act 1981. It states that "Notwithstanding anything contained in
any other law subject to the provision of this Act, and to any direction that the Central
government may give in this behalf a board may in the exercise of its power and
performance of its functions under this Act issue any directions in writing to any person,
officer or authority, and such person, officer or authority shall be bound to comply with
such direction."
This is an overarching provision that can be effectively utilized by the state governments
to take steps for pollution control.
ii. Subsidy on battery operated vehicles to be funded by the Air Ambience Fund:
The first scheme that is to be funded from the Air Ambience Fund is the programme to
give subsidy to battery operated vehicles. This will help to promote zero emissions
vehicles in the city. The Delhi government has decided to extend relief to the tune of 30
per cent of costs to those opting for battery operated vehicles. Prospective buyers of
these vehicles will get 15 per cent subsidy and 12.5 per cent VAT reimbursement. In
addition, the registration charge and one-time road tax levied at the time of registration
will also get reimbursed. This scheme started in 2008 will be funded entirely under the
Air Ambience Fund. This is expected to encourage expansion of the zero emissions
vehicles in the city.
iii. VAT subsidy to phase out diesel light commercial vehicles
The Delhi government has taken the decision to phase out 15 year old diesel light
commercial vehicles (LCVs). This is complemented by a fiscal incentive scheme that has
been prepared to encourage voluntary phase out the vehicles that are less than 13 years
old. To enable the transition the Delhi government has announced a subsidy scheme.
The subsidy will be equivalent to VAT (12.5 per cent) that will be provided on purchase of
new LCVs. Owners of LCVs below 13 years of age can avail benefit of the VAT subsidy.
This is a voluntary programme. This programme has started in 2008.
iv. Fiscal support for CNG fuel
Delhi government has implemented one of the largest CNG programme. To make this
programme cost effective Delhi government has implemented fiscal measures targeted at
the CNG fuel and also at conversion of the vehicles fleet. These measures have been
implemented in the beginning of the programme during 2000-2001 under the Supreme
Court directive of July 28, 1998. These measures include the following:
a. CNG fuel for automotive use has been fully exempted from sales tax: This
has helped to maintain an effective differential with diesel fuel that CNG has
replaced in public transport buses and petrol used earlier in three-wheelers. The
CNG prices have dropped further by 2 per cent in 2008 on account of adjustment
in central excise duty announced in the Union Budget. The revised price stands
at Rs. 18.90 per kg. The current price of diesel is Rs. 31.76. It is important to
maintain this differential to promote clean fuels. This differential between CNG
prices and diesel ad petrol prices is also working as a very powerful incentive
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among the car owners. About 3000 to 4000 cars are estimated to be converting
to CNG every month in Delhi. This has certainly helped in the expansion of the
programme.
b. Subsidized loan for conversion of auto rickshaws and taxis: The Supreme
Court order of July 28, 1998, had directed fiscal incentives for three-wheelers
and taxis. Loan with 4 per cent subsidized interest was granted to the
beneficiaries. There was no provision for fiscal incentive for the bus owners
except a late decision to offer subsidized loan to the owners of lower socio
economic classes from the fund created from the penalty collected from the
diesel bus owners from April 2002 onwards until the complete phase out of the
stage carriage diesel buses. Only 80 bus owners were able to avail of this
scheme.
However, it is important to learn from Delhi's experience. The fiscal incentive for
the taxi and auto rickshaws could not be utilized effectively as the three-wheelers
owners often could not meet the criteria for loan. About 5000 to 6000 three-
wheeler owners were able to avail of this incentive. The market was beset with
middle men who facilitated purchases. The most important incentive that worked
for them was the wide differential between petrol and CNG prices and the fares
that were linked to the higher prices of petrol. This made cost recovery easy.
Bangalore
i. Green tax
Bangalore has taken the lead to introduce Green tax that is imposed on the older
vehicles. This was introduced on April 1, 2002. The tax schemes are different for
transport and personal vehicles. The transport vehicles that are more than 7 years pay
the green tax at the rate of Rs. 200 at the time of the annual renewal of their permits.
Two-wheelers and cars that are more than 15 years old are taxed at the rate of Rs.250
and Rs.500 respectively at the time of the renewal of their registration after 15 years from
the date of purchase and first registration.
ii. Fiscal incentive for LPG conversion
Bangalore has launched one of the largest LPG three-wheeler programmes. One of the
key elements of this programme is fiscal incentive for conversion. The city government
has offered a subsidy of around Rs 2000 to three-wheeler owners to help bear the cost of
conversion. Nearly 70,000 autorickshaws have already converted to LPG.
Tamil Nadu
Green tax on old vehicles
The state of Tamil Nadu has also enforced green tax that is quite similar to the Bangalore
model. This was enforced in August, 2003.
Transport vehicles including autorickshaws and other commercial vehicles that have
completed 7 years of age from the date of its registration have to pay Rs. 200 and Rs.
500 per annum respectively as green tax.
Personal vehicles, cars and two-wheelers, that have exceeded the age of 15 years, pay
Rs. 500 and Rs. 1,000 respectively as green tax for 5 years.
According to status report of Chennai city submitted to EPCA in May 2008, more than Rs
15 crore can be generated from this green tax in a year. As of now revenue from this tax
has not been earmarked for any special purpose.
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Hyderabad
Exemption of motor vehicles tax on vehicles running on CNG, battery and solar
power
In order to promote alternate fuels and technologies, the Andhra Pradesh Motor Vehicles
Taxation Act, 1963 provides for exemption of motor vehicles tax for a period of 5 years
from the date of registration of motor vehicles using CNG, battery and solar power.
Most of these measures have been introduced recently. It is therefore, not yet possible to assess
the impact of these schemes. Implementation of these schemes should be publicized adequately
to make the target groups aware and to encourage them to avail of the benefits. It is also
important to monitor the impact from time to time to assess if the schemes are making the desired
impact.
Box
Central taxes with environmental linkages to vehicles
Lower central excise duty on small cars for efficiency gains
The central excise duty has been crafted to give an advantage to the small cars in India for fuel
savings. The current rate of 12 per cent excise on small cars and 24 per cent on bigger cars and
SUVs has been maintained in the budget. We would in the future like to see this differential
increase. This is the only measure that is linked to addressing the need of fuel efficiency of
vehicles in India.
However, the flaw in the current tax scheme is that the small car segment has been defined as a
car of length not exceeding 4,000 mm and with an engine capacity not exceeding 1,200 cc for
petrol cars and 1,500 cc for diesel cars. The more relaxed limit for diesel cars has brought within
net a large number of mid segment diesel cars to qualify for the tax cut. This has created
incentive for small diesel cars when clean diesel fuel and technologies are not available in the
country. This can have adverse public health consequences.
3. Tax policy to promote public transport in cities: A non starter
As of now no effort has been made to rationalize the transportation related state taxes to promote
public transport. Public transport is among the key strategies to reduce congestion and pollution
and requires strong fiscal support.
The National Urban Transport Policy has proposed that the Central Government must encourage
the levy of dedicated taxes to be credited to an urban transport fund to exclusively meet urban
transport needs. These could be in the form of a supplement to the petrol and diesel taxes,
betterment levy on land owners, or even employment tax on employers.
The city of Surat in the state of Gujarat is the only city in the country where a dedicated
metropolitan fund has been created for urban transport projects. So far this fund has been
created through budgetary allocation and not through levy of dedicated taxes. But this is an
important step forward.
Across the country, buses pay the highest taxes as compared to cars or two-wheelers. This is
also confirmed by a 2004 World Bank study that estimates total tax burden per vehicle km is 2.6
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times higher for public transport buses than cars in India. As cities are gearing up to design fiscal
measures they should attach priority to creating fiscal incentive for public transport.
This issue will have to be addressed urgently in all cities to reverse the trend and stimulate
investment in bus transport sector and to make public transport usage more competitive vis a vis
usage of personal cars and scooters. It is not appropriate to treat bus operation as a mere
commercial enterprise and put heavy taxes on it. Bus transport is an essential public service; it
moves more people than personal vehicles; emits less toxic and uses less fuel per passenger
kilometer than personal vehicles. But currently tax rates are not related to the space used by the
vehicles, or emissions and congestions caused by them. Keeping in mind the environmental and
congestion reduction benefits of an efficient public bus transport system, tax policies need to be
corrected to make bus transport economically more attractive.
The review of the available information on the incidence of state motor vehicle taxes in the
concerned states brings out the distortions in taxes on buses and cars and the inequitable burden
of taxes on buses in the cities. (See the annexed table: Motor vehicle taxes on personal vehicles
and buses). All cities impose motor vehicle tax on vehicles as road tax on vehicles and
road/passenger tax on buses. In the case of personal vehicles these taxes are imposed on the
vehicle at the time of purchase for the lifetime (15 years from the date of registration). In public
transport buses these taxes are calculated annually on the basis of the number of passenger
carried. Currently, buses are actually penalized for carrying more passengers than cars. This will
have to be reversed. Cars that occupy more road space but carry less passengers should be
made to pay more.
The city action plans, monitored by the Hon'ble Supreme Court, requires the cities to meet a
target of modal shift in favour of public transport. To fulfill this all city governments will have to
invest heavily into augmentation public transport especially bus transport. This will need i)
reduction in the capital cost of rolling stock of buses by minimizing/eliminating central excise duty
and VAT; ii) reduction in operational cost of buses by lowering/eliminating state taxes on bus
operations; iii) Increasing taxes on usage of personal vehicles.
The Union Budget of 2008-09 has reduced excise duty on buses and their chassis from 16 per
cent to 12 per cent. But excise duty on buses is still equal to the excise duty on small cars. While
the Central government would have to look at the ways to further lower the Central excise to help
lower the cost of a bus, the state governments should also reduce the burden of state taxes on
bus operations drastically. This can go a long way to promote public transport.
Parking pricing
So far there are no instances of tax measures to restrain car usage in cities. Only a few cities
have taken preliminary steps to revise the parking rates to integrate the elements of graded
parking rates according to duration of stay and importance of a place. New D elhi Municipal
Council, Bangalore Municipal Corporation, Kolkata, Mumbai are moving in that direction.
Parking pricing is one of the most powerful instruments to reduce travel by personal vehicles. It
helps to influence commuting choices in favour of public transport. Parking management when
combined with high price for parking, limiting parking space and improving access to the same
place through other modes of transport, it is most effective in stimulating the switch from private
cars to alternative modes of transport. There is therefore considerable opportunity in Delhi and
other cities of India to develop parking policy as an instrument to decongest, shift commuter
choice towards public transport, and discourage car use.
Kolka ta : " Car crowd tax" Life time tax on cars increased
West Bengal government has announc e d one-time increase in registration tax that will range from
Rs 2,000 to Rs 8,000, depending on the engine capacity. The new rates will cover registration of
cars, buses and battery-operated v ehicles. The one-time revised tax is valid for five years after
which the owner of the vehicle can pay the levy at the old rates. For those who are paying a five-
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year road tax for old cars, there will be no change in the structure. A special tax for vehicles with
air-conditioners remains unchanged but a new c ategory has been introduced for engine capacity
beyond 2500cc.
Bangalore: Lifetime tax on cars increased
Bangalore proposes that the lifetime tax on all passenger vehicles except two-wheelers would be
increased by two per cent. To meet the increasing expenditure on development and maintenance
of the road network in the state, some of the burden is being passed on users of cars and multi-
utility vehicles. And slow down the alarming rate at which vehicles are being added in urban
areas, causing traffic jams and pollution.
4. Sign post
The move made by the city governments to implement fiscal measures to address the problem of
vehicular pollution is important. This needs active encouragement and dissemination to
popularise this practice. It is therefore recommended that the concerned state governments
examine the fiscal measures already in place in different cities to -- promote clean technology and
fuels; to discourage older vehicles; to encourage public transport, and to create dedicated funds
to meet the cost of pollution control. This will help to ease the cost of transformation. A large
number of fiscal measures are possible. Each city should evolve its model of tax regime
customized to the local requirements and imperatives. Experience sharing among the peer cities
will be a critical element of this strategy.
However, this is a small beginning. More proactive steps are needed to create a basket of tax
measures to restrain personal vehicle usage and promote public transport ridership in cities; and
at the national level central tax measures are needed to push for technology and fuel quality
improvements.
The state governments should develop a comprehensive model of tax measures with the
following focus.
· Implement tax policy to improve ridership and augmentation of public transport:
Revise tax policies to reduce the tax burden on public transport. This can help to lower
the operational costs and make public transport more cost effective. The reduction in
revenue on this count can be offset by higher taxes on personal vehicles and their usage.
· Create dedicated funds by taxing polluting technologies and fuels: Higher taxes on
personal vehicles and polluting technologies and fuels can help to create dedicated
corpus to fund clean air programmes in the cities. This can be imposed on the basis of
polluter pay principle and under the provision of the Air Act.
· Use tax policy to introduce clean/zero emissions technology and fuels: This is an
important step to create market for advanced technologies that find competing with
conventional technologies difficult. Waive off or minimize state taxes on these vehicles.
The market for vehicles running on alternative fuels like CNG, LPG, battery operated
vehicles and hybrids are expected to expand. Fiscal measures can help in the make
over.
· Fiscal measures for congestion reduction: A wide gamut of fiscal measures has
evolved globally targeted to restrain personal vehicle usage that include road pricing,
congestion pricing, parking pricing. But the Indian cities have not developed these tax
systems yet. It is important to make the beginning now. A phase in plan is needed to
introduce similar measures customized to local needs. As a first step some of the cities
are already working towards developing parking policy that will include parking charges
as a car restraint measures.
· Develop monitoring system to assess the impact of the fiscal policies: Most of the
tax measures are very new and therefore it is too early to understand the effectiveness of
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these measures. But these will require constant impact monitoring and active publicity of
the schemes for effective implementation. This will also help to modify strategies and
make improvements.
· Facilitate database on taxes on vehicles: There is enormous variation in the tax
structure and quantum of tax related to transportation in different states. It is important to
review the current tax structure and rates. This will help to convey the existing distortions
and the reforms needed to achieve the desired objectives. This information is important
to expedite reform and implementation of green taxes.
· Develop Central tax measures to promote clean technology and fuels
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Annex
Incidence of motor vehicle taxes on vehicles in se lected Indian cities
The limited information available from the states indicates enormous distortions in the taxes on
buses and personal transport. Buses are taxed several times higher than personal vehicles.
Cities Tax on personal Tax on buses Tax policies are
vehicles (cars and skewed against
two-wheelers) public transport
Lucknow and Two-wheeler: Lifetime A standard bus with a If amortized over the
kanpur tax of Rs. 1600 capacity of lifetime of the vehicle,
approximately 54 -55 the owner of a petrol
Petrol cars: 2.5 per seats have to pay Rs. car worth Rs. 4,00,00
cent of the value of 1115 for the first 35 pays Rs.667 as tax
the car or Rs. 5000 seats and Rs. 45 per annually.
(whichever is higher). additional seat per
quarter. The actual In contrast, a bus
Diesel cars: Twice of amount of tax varies pays a tax of Rs.
2.5 % of cost value of according to the 7880/- annually.
the car estimated passengers
carried. Thus, a bus pays
nearly 12 times more
than a car.
Ahmedabad Two-wheelers: the Standard stage If the lifetime taxes
lifetime tax on two- carriage bus: For are amortised, a
wheeler ranges more than 9 petrol car costing Rs
between Rs.1500 passengers Rs 840 400,000 pays about
Rs.2000 per year, plus Rs 72 Rs. 1333 annually and
per seat, and Rs 36 a diesel car costing
Petrol car: pays per standing Rs 400,000 pays Rs.
lifetime tax at 5 per passenger. In addition 2000 annually.
cent of the cost of the to this a surcharge of
vehicle and a 50% subject to The tax burden on
maximum limit of Rs buses is much higher
Diesel car: 7.5 per 636 is imposed. as the total tax is
cent of the cost of the calculated according
vehicle. Roughly a standard to the passenger
bus, based on its carrying capacity of a
sitting and standing bus.
capacity, pays about
Rs. 5000 annually.
Bangalore Two-wheelers: Buses: Rs 500 per A two-wheeler costing
Lifetime tax according seat per quarter. Rs 40,000 pays a
to the engine lifetime tax of Rs.
capacity. For each 2800 which if
category the lifetime amortized over its
tax is calculated at 7 lifetime can work out
percent of the cost of to be Rs.187 annually.
the vehicle or an
indicated amount A car costing 4 lakh
whichever is higher. may have to pay Rs.
2400 per annum.
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Cars: 9 percent of the
cost of the vehicle if If the bus has 54
the cost is less than seats the annual tax
Rs 10 lakhs. And 10 can be as high as
percent on cars Rs.108,000.
exceeding 10 lakhs.
Chennai Two wheeler: Lifetime Stage carriage bus If amortized over its
tax is imposed within Chennai lifetime a 170 cc two-
according to the metropolitan area: Rs. wheeler pays Rs. 200
engine capacity. Eg a 80 per seat per annually.
vehicle with 170 cc quarter plus a
engine pays a lifetime surcharge of Rs. 20. Car costing Rs.
tax of Rs. 3000. 4,00,000 will have to
pay a life time tax of
Cars: 6% of the cost Rs. 24000/-. If
of the vehicle. amortized over its
lifetime tax works out
to be Rs. 1600
annually.
Bus with a capacity of
54 passengers pays
Rs. 17,360 annually.
Delhi Two-wheeler: Life Bus pays an annual If amortized over 15
time tax of 2% of the tax of Rs. 1915 upto years a car costing
cost of the vehicle. 18 passengers and upto Rs. 4,00,000
Rs. 280 for every pays an annual tax of
additional passenger. nearly Rs. 533.
Car: Cars costing upto A bus with a seating
Rs. 4,00,000 pays 2 capacity of 40
per cent of the value. passengers and 20
Cars with cost legal standee pays
exceeding Rs. nearly Rs. 13675 as
4,00,000 pays 4 annual tax.
percent.
Hyderabad Two-wheeler: Lifetime Bus: 5 percent of the If amortised over
tax on two-wheelers is gross traffic earning in lifetime a car costing
9 per cent of the cost the city every year. Rs. 4,00,000 pays Rs.
of the vehicle. 2400 as tax.
Cars: 9 per cent of the Bus pays a fixed
cost of the vehicle. percent on its
earnings every year
which is higher than
the lifetime tax that
the cars pay.
Pune Two-wheeler: Lifetime Stage carriage bus: Like other cities the
tax of 7 per cent of the Rs. 71 per passenger tax burden on buses
cost of the vehicle. per year plus a is several times higher
passenger tax at 17.5 than the personal
Car: 4 per cent of the per cent of the fare vehicles
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cost of the vehicle. collected.
There is a proposal to
reduce the passenger
tax to 6 per cent.
Source: Road Transport Yearbook 2004 -2005.Union ministry of shipping, road transport and
highways; http://www.uptransport.org/tax.html;. http://www.tn.gov.in/sta/taxes.html
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