Budget 2019: A Vehicle Area Tax could ease Bengaluru's traffic woes

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The annual Budget mela is under way, with the usual flurry of TV talk shows, conferences, statements about what to expect. The proposal is for a Universal Basic Income (UBI). Cash transfers are increasingly replacing complex and wasteful indirect subsidies.

This article is not meant to discuss the pros and cons of UBI, but to recommend a precise road transport policy. In daily urban lives, where the proverbial rubber meets the road, traffic congestion and the resultant cutting of trees to build roads, is a severe malady. The problem is more acute in Third World cities, including Bengaluru, due to the rising travel and living space needed for rural migrants.

Congestion occurs because road space is free or very inexpensive. Cars will always expand to fill up the available road space. As I have argued in a series of articles from 2006 onwards, public transport by itself is not the solution. In London, despite its excellent underground Tube and bus network, average motor travel speed in 2000 was about 10 mph, similar to that of the horse and carriage a hundred years earlier.

Tube ridership and travel speeds picked up after 2003, when the city of London introduced congestion charging—stiff levies for entry into toll roads leading into the City. However, over time, road congestion has slowly built up and speeds have fallen there.

Such conventional congestion charging—letting vehicle area be inexpensive but charging for the use of the road—is a reactive policy. It does not curb the build-up of vehicle area in the first place. It’s better to charge pre-emptively and steeply for vehicle area, a policy that needs to be outlined.  Suppose the area of my car, measured around its edges, is 5 square meters (sq m) and the vehicle area tax rate is Rs 4,000 per sq m, per year. Thus, I should be required to pay Rs 20,000 per year as a Vehicle Area Tax or a Vehicle Area (Annual) Levy, or VAAL.

The rationale is that a car is mobile land not paid for, unless parked on the owner’s premises. To modify a famous economic dictum, there should be no such thing as free vehicle area.

Ideally, VATAX should be on all motor vehicles. Further, it should be revenue-neutral, which means the collected amount should be offset by reductions in other taxes. The goal of VATAX is not for the government to grab more money from the public, which it tends to spend wastefully. Instead, the goal is to reduce congestion and associated ills by curbing vehicle area, or at least its growth.

For instance, I should be charged Rs 20,000 as VATAX only if the other taxes I pay are reduced by equivalent amounts: the lifetime tax, excise duties, etc. If there is any surplus, it should be returned as an income tax rebate. We could also reduce excise or equivalent taxes on petrol, which are very high in India. I prefer to call it VAAL and not VATAX, to convey that it is not a conventional tax, but merely a levy or a user charge.

Such a revenue-neutral VATAX is unlikely. Governments are likely to use it to raise more revenue. However, the policy will still be beneficial since it will reduce vehicle area and thereby the amount needed to be spent on infrastructure—specifically on building roads to accommodate extra vehicle area.  

Practically, it is hard to tax vehicles that have already been bought, especially since they have paid Lifetime Tax (LTT). It is more feasible to impose VATAX as a surcharge on new cars. In Bengaluru, this can be done by diverting the revenue to Bangalore Metropolitan Transport Corporation (BMTC), which has been facing a substantial revenue loss in 2018. It is reportedly planning to cut loss-making routes and/or raise bus fares.

DT Devare, who has been working with the Bangalore Environment Trust, says that based on the Top 10 new cars sold in India in 2018 until November, if an estimated 5 percent of them had been sold in Bengaluru—about 79,000 vehicles. The average area per car is about 6.57 sq metres, which means the total new vehicle area sold was about 5.17 lakhs sq meters. If the one-time VATAX surcharge is Rs 4,000 per square metre, then Rs 206.9 crore revenue can be raised in 2019. This would plug BMTC’s shortfall without closing loss-making routes or raising fares.

A one-time surcharge on new vehicles sold is legally much simpler than a regular VATAX on all vehicles. The latter is a desirable long-term goal, and would require various legal changes involving the Motor Vehicles Act and other fiscal matters. The VATAX is a policy whose time has come, locally and globally.

The author is Professor, Economics and Social Sciences Area, IIM Bangalore. This article relies on his previous articles posted on unclogroads.com.

[This article has been published with permission from IIM Bangalore. www.iimb.ac.in Views expressed are personal.]