News
Life beyond oil: Can distance tax ease the switch?
Summary
Taxes on oil make up a chunk of government revenue. Surging interest in electric vehicles, however, puts this under threat. Distance tax is touted as one way to offset any loss in revenue. What is it, how effective will it be, and how does it work? Mint finds out.
What is distance tax and how does it work?
Also called mileage-based user fees, or road-user charges, distance taxes are levied on motorists based on their road usage and mileage. In other words, the more you drive, the more you are taxed. The rates can be flat—in ₹ per kilometre terms—or variable, depending on where or when you are driving. It can also be tweaked on the basis of the type of vehicle one uses. It is one of the ways in which revenue loss from a decline in the sale of petrol and diesel can be recovered in a fuel-neutral manner. As the costs are distributed over time, a distance tax is a better alternative to flat taxes.
How can the tax be implemented?
There are multiple technology options for implementing distance tax for vehicles. These include automatic number plate recognition system, radio frequency identification system or dedicated short range communication system. The most prevalent system that may be apt for India is using GPS to calculate the monthly or annual mileage of a vehicle. GPS-based toll collection currently being considered by the government can come in handy for this. Distance tax can be charged to a consumer at toll plazas and public charging stations. They can also be added to the vehicle’s annual insurance bill.
What are the other options that can be considered?
The other alternatives include increasing existing fuel tax rates, an annual fee on EVs, and increasing the following: tax on electricity, GST on EVs, and toll tax. These are harder to implement than distance tax. Annual flat taxes or hiking GST on EVs could potentially disrupt the switch to clean energy while hiking taxes on fuel, toll or electricity is politically unfeasible.
How is distance tax the better alternative?
Besides helping to offset the loss of revenue from fall in oil-guzzling vehicle usage, distance tax can encourage or discourage types of vehicles and manage behaviour on the road. Currently, GST is lower for small petrol and diesel cars but there is no differential in EVs. Through distance tax, small vehicles that cause less congestion and have lower carbon footprint can be incentivized. Since it is based on usage it also rewards those who use vehicles sparingly and has for long been advocated for boosting public transport use.
How much does oil tax earn the government?
Most governments around the world are fiscally dependent on fuel tax revenues. According to the Petroleum Planning and Analysis Cell (PPAC), petroleum accounted for over 17.5% of the Centre’s revenue in 2022–23. And 15% of the revenue for all states and UTs came from VAT on petroleum products. According to experts, the current pace of transition to EVs will result in a loss of tax revenue by 10.2%, or ₹1,457 crore, to the Delhi government in 2030. The Centre will lose 10% revenue from fuel taxes due to EVs in Delhi.
