Working Paper

Passenger car taxation in India: Shifting to an emissions-linked structure

After the Goods and Services Tax (GST), the GST cess is the second largest pool of taxes collected on passenger cars in India. This paper uses sales data for fiscal year (FY) 2020–21 to analyze the impact of three different GST cess structures: a baseline scenario in which the cess is not directly linked to carbon dioxide (CO2) emissions; an emissions-linked GST cess structure as proposed under the draft National Auto Policy (NAP), 2018; and a hypothetical continuous linear function for an emissions-linked GST cess.

The authors find that the baseline GST cess structure in which rates are based on vehicle length, fuel type, engine displacement, and ground-clearance misses opportunities to distribute the tax levy commensurate with vehicle fuel consumption. While the structure proposed under the draft NAP, 2018 also has limited potential to drive fuel-efficiency improvements in the fleet, a GST cess linked to vehicle emissions smooths out the imbalances in tax versus emissions levels observed widely across all tax categories in the baseline structure, including cars within the lowest tax bracket of 1%. The modeled emissions-linked linear GST cess function levies ₹0.036 lakh (US$49) per additional g CO2/ km on cars with emissions higher than 110 g CO2/km and such a schedule covers about 80% of the FY 2020–21 fleet. Note that the modeled linear function in this study is among several design possibilities to construct a continuous function for India’s passenger car fleet. Continuous emissions-linked functions for the GST cess can encourage consumers to purchase vehicles with lower emissions and manufacturers to invest in fuel-efficiency improvements.

Fiscal policies