Final Report ROAD USER TAXES IN INDIA Issues in Tax Policy and Governance Mahesh C Purohit Vishnu Kanta Purohit Foundation for Public Economics and Policy Research New Delhi-110052 Final Report ROAD USER TAXES IN INDIA Issues in Tax Policy and Governance (Study Sponsored by Planning Commission, Government of India) Mahesh C Purohit Vishnu Kanta Purohit Foundation for Public Economics and Policy Research New Delhi-110052 Preface The Foundation for Public Economics and Policy Research is an autonomous, non-profit organization whose major functions are to carry out research, undertake consultancy work, and conduct training in the areas of public economics and policy. The Foundation undertook this study with financial support from the Planning Commission, Government of India. The authors are grateful to the Socio Economic Research Division of the Planning Commission for sanctioning this study. However, the Planning Commission is not responsible for the findings or opinions expressed in the study. The main objectives of this study are to evaluate the structure of all transport taxes levied by the Centre, State and local governments and to recommend a rational system of taxation to achieve higher overall growth in the road transport sector. This will, in turn, lead to growth in trade and industry in the country. This study is the result of the collective effort of the project team of the Institute under the guidance of Dr. Mahesh C. Purohit, who prepared the final draft of the study. We acknowledge the valuable contributions made by the other members of the team, especially Dr. (Mrs) Vishnu Kanta Purohit who contributed to the study tremendously and provided unstinting support, including the preparation of the draft of the chapters. Thanks are due to Dr. Amrat Lal Meena for providing excellent research assistance throughout the tenure of this study and helping in the analysis of the relevant data and issues. Ms Surajita Rout, Ms Madhulika and Ms Samarpita Sinha also contributed in some of the chapters at different stages. In this endeavour, a large number of organizations and individuals have contributed in various ways to this study. The team has greatly benefitted from the discussions with the i Transport Secretaries and other officials of the respective State Governments. The team is grateful to them for finding time to discuss the issues related to the structure and administration of all the taxes related to motor vehicles. The authors want to express their gratitude for the help received in collection of data from Dr. N. A. Khan, Associate Professor, ICFAI University, Hyderabad; and Mr. Makshud Ahmed, formerly from RTO, Bikaner, Rajasthan. The team is specially indebted to Shri T. R. Rustagi, former Director-General of Inspection, Customs and Central Excise in New Delhi for his help in getting us the relevant information on customs and excise. In particular, the authors want to express their gratitude to Dr G. L. Aggarwal for his valuable insights during the course of work on the project. Special thanks are due to Dr. B. N. Puri, Senior Consultant (Transport and Tourism), Planning Commission, for sparing time to discuss various policy issues. Unstinted support to the work by Dr. Arvind Kumar, Advisor (Transport Research), Ministry of Shipping, Road Transport and Highways; and Mr. S. K. Das, Joint Secretary (Transport & Administration), Ministry of Shipping, Road Transport and Highways, Government of India, New Delhi, is gratefully acknowledged. Valuable comments on the Report received at a seminar given at the Planning Commission from the participants especially from Dr. B. N. Puri and Dr. Arbind Modi are gratefully acknowledged. Special mention needs to be made of the help received from late Mr. J. M. Saxena, former Director, All India Motor Transport Congress, in providing valuable information from different transport organisations in the country and also enabling the members of the research team to personally contact some of the transport operators to ascertain their views on the subject. The authors are also grateful to Mr. S. P. Singh, Fellow, Indian Foundation of Transport Research and Training, New Delhi, for the discussions on various aspects related to the subject. Last but not least, the competent secretarial assistance provided by the administrative staff, especially Mr. Rakesh Kumar, is gratefully acknowledged. The Governing Body of the Foundation does not bear any responsibility for the contents or views expressed in the report. The responsibility rests with the authors, in particular, the leader of the team. New Delhi Mahesh C Purohit October 15, 2010 Director ii Contents Page No. Preface i List of Tables v List of Exhibits vi List of Annexure vi Executive summary vii 1 Introduction 1 Trends and Composition of Vehicles in India The Policy Issues Objectives and Scope of the Study Structure of the Report 2 Fiscal Significance of Road User Taxes 9 Revenue of Motor Vehicle Tax Revenue from Passenger and Goods Tax Revenue from Total Tax on Vehicles 3 Economics of Road User Taxes 24 Issues in Road Pricing Concept of Road User Tax Why Road User Taxes? 4 Structure of Taxes on Motor Vehicles 33 Taxes on the Purchase of Vehicles Taxes on Ownership of Vehicles Taxes on the Operation of Vehicles 5 Toll Charges for Financing of Highways 104 Road Network Scenario Financing Highway Development Reform and Restructuring of Highway Financing User Fee Finance Mechanism Toll Rates Management of Toll Collection 6 Eco-taxes for Vehicles 122 Public versus Private Transport General Taxes on Motor Vehicles in OECD Countries Eco-Taxes in OECD Countries Instituting Eco-Taxes Purchase Taxation Measures Circulation Tax Measures Taxes for Demand Management Giving New Thrust to Road Fuel Taxes iii 7 Reforms in the Structure of Road User Taxes 138 Assessment of the Existing Taxes Reforms in Road User Taxation 8 Management of Road User Taxes 152 Organization for Administration Structure and Functions Procedures of Road User Tax Documentation Formalities for Different Operations 9 MIS for Road User Taxes 205 Objectives of MIS Information Needs Analysis MIS in Indian States Activities of an Integrated Information System Proposed MIS for Motor Vehicles Tax Administration Pre-Requisites of MIS References 216 iv List of Tables Table No Title Page No. 1.1 Registered Motor Vehicles in India 2 1.2 Total Registered Motor Vehicles in India (State-Wise) 4 from 1998 to 2006 (as on 31st March) 1.3 Total Registered Motor Vehicles (Category-wise) in the 5 States/UTs of India (As on 31st March, 2006-Provisional) 2.1 Revenue significance of Taxes on Vehicles: All States 10 2.2 Trends in Motor Vehicles Tax in different States 12 2.3 Trends in Passengers and Goods Tax in Different States 17 2.4 State-wise Total Tax on Vehicles 23 4.1 State-wise Tax on Purchase of Motor Vehicle 35 4.2 Road Tax on Motor Cycles in Indian States 39 4.3 Road Tax on Motor Car (Personal) in Indian States 40 4.4 Road Tax on Ordinary Private Stage Carriage in Indian 42 States 4.5 Road Tax on Goods Carriages in Indian States 43 4.6 Fees for Fitness Certificate in Indian States 47 4.7 Taxes on Fuel at the Centre and States level 48 4.8 Goods and Passenger Tax in Indian States 50 4.9 Driving License Fee Structure in Indian States 54 6.1 State Level CO2 Emissions: 2000 123 6.2 Contribution from Vehicle Exhaust to the Total Pollution 124 Load (%) 6.3 Application of Economic Instruments in Various 133 Countries 6.4 Rates of UK Vehicle Excise Duty from 1st May 2009 136 7.1 Incidence of Tax on Motorcycle in India 139 7.2 Incidence of Tax on Motor Car (Personal) in India 140 7.3 Incidence of Tax on Ordinary Private Stage Carriage 141 7.4 Incidence of Road Tax on Goods Carriages 142 7.5 Tax on Motorcycle in India 145 7.6 Tax on Motor Car (Personal) in India 146 7.7 Tax on Ordinary Private Stage Carriage 147 v List of Exhibits Exhibit No. Title Page No. 2.1 Total Tax on Vehicles and its Components as percent of 19 SOTR 2.2 State-wise Total Tax on Vehicles as a Percent of SOTR 19 6.1 Deviation in the National Ambient Air Quality Standards 123 8.1 Organization for Administration of MVT: Illustration of 161 Haryana. 8.2 Organization Chart of Transport Department of Orissa 162 8.3 Organization Chart of Transport Department of UP 163 9.1 Proposed MIS for Road User Taxes in India 215 List of Annexure Annexure No. Title Page No. A.4.1 Structure of Registration Fee in Indian States 61 A.4.2 Structure of Permit Fee in Indian States 66 A.4.3 Structure of Motor Vehicle Tax in Indian States 76 (for Two Wheelers) A.4.4 Structure of Motor Vehicle Tax in Indian States 77 (for Three Wheelers) A.4.5 Structure of Motor Vehicle Tax in Indian States 79 (for Non-Transport Four Wheelers) A.4.6 Structure of Motor Vehicle Tax in Indian States 84 (for Goods Vehicles) A.4.7 Structure of Motor Vehicle Tax in Indian States 95 (for Passenger Vehicles) A.7.1 Assumptions for calculating tax burden on newly 151 purchased vehicle for the first year of purchase A.8.1 Description of Forms Prescribed under Motor 164 Vehicle Act A.8.2 Commonality of Data in Various Forms under 179 Motor Vehicle Act vi Executive Summary Road transport is a basic mode of transport for people to travel and to carry goods. Its capacity needs to be enhanced and road quality has to be improved to cope with the increasing pressure of road traffic. Over time, the number of personalized vehicles has increased significantly, causing concentration of vehicles in cosmopolitan towns and increase in air pollution.