CNG: Government’s green money spinner

Earlier this month, Prime Minister Narendra Modi said that he can't tax milk and Mercedes (cars) at the same slab. He probably meant that buyers of Mercedes will have to be taxed more as these cars are bought by the rich whereas milk is more plebian that needs to be made affordable with a lower tax.

Apply that logic to transportation in general: a fuel system that is increasingly used by the masses in public transport, is more efficient and has a better quotient green should most likely be taxed at lower rates compared to those that pollute the atmosphere. The Supreme Court has taken a view that vehicular pollution has to be reduced significantly to make Indian cities more liveable.

So, when the government taxes an efficient and a non-polluting fuel system in the highest GST slab, you begin to wonder what the dynamics are and if the intent of the government is really keen on lowering pollution and making our transportation more productive.

The prevailing GST on compressed natural gas (CNG) kits stands at 28%, the highest of the four slabs of tax on various goods classified largely on the same premise Modi used for charging milk at lower rates. You may want to argue that cars, whether petrol or diesel, are being taxed at 29-43% (including cess) depending on their size and therefore, it is fair that CNG is pegged at the lowest end for vehicles.

Two additional facts cook the case. 85% of CNG kits, unlike Mercedes, need to be imported and the GST comes on top of the 5-7.5% import duty payable on them. Secondly, unlike elsewhere in the world, India does not have vehicles that run solely on CNG. Kits have to be retrofitted on petrol vehicles and, in effect, users will have to spend over and above the vehicle price to convert them to gas. In fact, CNG kits are classified as accessories and spare parts of spark ignited engines and don't carry any special tag as pollution beaters.

Out of the 1.44 million passenger vehicles India's biggest car manufacturer Maruti Suzuki sold in the financial year ended March 2017, only 74,000 or a mere 5% sported CNG kits. That's despite the fact that the cost per kilometre of driving a CNG car is a little over half that of a petrol driven car.

In a country which buys the most number of small cars in the world and with Indian customers being rated as highly value-conscious, it stands out that a cheaper and more efficient fuel system hasn't caught the market's fancy yet. Globally, even premium cars like the BMW run on gas for its green tag. The apathy of policy is largely to blame.

The news of the kits being classified in the highest slab came last year even as the  National Capital Region's (NCR) air pollution reached a pinnacle (NCR runs the most number of CNG vehicles in the country). It also coincided with increasing prices of petrol and diesel that put an increased demand on alternate fuels. Thanks to increased taxes and other price hikes, the cost of a CNG kit has shot up by Rs 9-12,000 in the last one year. That's six months fuel bill for a small household.

In the gas supply too, the government has been making a lot of money as it currently has a near monopoly now in automotive gas filling stations. The price of gas in these supply stations are dictated by the government, which allows for a substantial margin for the supplying companies like Indraprastha Gas Limited and Mahanagar Gas.

The government indirectly owns a big chunk of these two companies through firms like Gas Authority of India (GAIL) and Bharat Petroleum. Last year, both these companies boasted a net profit margin (after taxes) of 20%, much ahead of other fuel supply companies like Hindustan Petroleum and Bharat Petroleum at 3% and 4%, respectively.

In a way, if GST on CNG kits were brought down to a level that will spur consumption, it will only help the government as it will make more money from gas supply. Add to that, a lower CNG price can further drive usage. India also lags behind in "Make in India" of CNG kits, which are either imported from Italy or China. Local kits are at least 15% cheaper than imported ones.

All this underscores that the lack of a clear policy has restrained companies from investing in the sector. There are only two companies in India that manufacture the metal tanks for storing CNG in vehicles and they have raised prices by nearly 40% in the last year because of increased demand. Advanced technology tanks that are available globally weigh only a third of a typical 70 kg Indian tank, which can increase fuel efficiency further.

With an increased oil import bill looming large, it is time for a CNG push that will address taxation, gas prices and technology transfer for local manufacture. An efficient, cleaner transportation system will be a good by-product to have.