India slaps levy on new car sales in fight against pollution and congestion

By Aditi Shah

NEW DELHI (Reuters) - India introduced an additional 'green' tax on car sales on Monday, aimed at helping fight high levels of air pollution and congestion but hitting car makers that fear this could stall a fragile recovery in the market for their products.

In his annual union budget, Finance Minister Arun Jaitley imposed a sales levy of up to 4 percent on new passenger vehicles, effective immediately, spurring a sell-off by investors in auto stocks like Maruti Suzuki India Ltd and Tata Motors.

The tax is another blow for automakers, coming after the Supreme Court temporarily banned the sale of large diesel cars in Delhi, one of the world's most polluted cities.

As a result of the new tax growth in sales in the year to end-March could come in a few percentage points lower than previously expected, said Vikram Kirloskar, vice chairman of Toyota Kirloskar Motor, the local unit of Toyota Motor Corp, the world's largest carmaker.

Passenger vehicle sales are expected to rise between 6 percent and 8 percent in the year to end-March, the Society of Indian Automobile Manufacturers estimates as the economy slowly recovers. Yet, in January, passenger car sales fell 0.7 percent from a year ago - the first fall in 14 months.

The budget proposes a 1 percent tax on cars less than four metres in length and with engines smaller than 1200cc that run on petrol, liquified petroleum gas or compressed natural gas.

Small diesel cars less than 4 metres long and with engines below 1500cc will be taxed at 2.5 percent and bigger diesel vehicles at 4 percent.

It is estimated that the tax will generate 30 billion rupees ($439 million) in revenue for the government.

Kirloskar said that if the money is used to get cars with older emission technology off the road and to stimulate the production of hybrid and wholly electric cars, "it will be money well-spent and tax well-paid."

R.C. Bhargava, chairman of Maruti Suzuki, which sells one in every two cars in India, said the industry was being unfairly singled out in the fight against pollution.

Shares in Maruti Suzuki ended 5 percent lower and Tata Motors Ltd closed 0.7 percent down in a weak Mumbai market that ended 0.66 percent lower.

The government, separately, plans to levy a luxury tax of 1 percent on sales of passenger vehicles priced higher than 1 million rupees.

While increasing taxes, India is also expected to spend 970 billion rupees over the next fiscal year on improving and building new roads and highways, which car makers say could partially offset the negative impact.

($1 = 68.2967 Indian rupees)

(Additional reporting by Himank Sharma in Mumbai; Editing by Greg Mahlich)