Purchasing a diesel car may turn out to be more expensive than expected; with the Indian oil Ministry suggesting a steep tax to be levied on these vehicles.

In a letter addressed to Finance Minister Pranab Mukherjee the previous week, Oil Minister S Jaipal Reddy recommended a hike in excise duty to be imposed on these diesel-based vehicles. The proposed levies, it is said, will be as steep as INR 255,000 for sedans and sports or multi utility vehicles, while smaller vehicles will be slapped with an excise tax of INR 170,000.

Those favorable to the proposal argued that the additional levy will make up for the heavily subsidized cuts in diesel prices. As of now the subsidy is Rs 12.53 per litre of diesel, and on an annual basis is projected to cross INR 1,000 billion (100,000 crore) in the current fiscal.

The subsidy on fuel is INR 12.53 per litre and on an annualised basis, it amounts to Rs 1,000 billion (INR 100,000 crore) out of the total fuel subsidy, estimated at Rs 1784.98 billion (178,498 crore) in the current fiscal.

 "I request you to consider imposing additional excise duty on diesel vehicles as it would discourage dieselisation of economy and bring additional revenue, which could be used for meeting under-recoveries of oil marketing companies," Reddy wrote to the Finance Minster. "The difference between the price of petrol and diesel is acting as an incentive for diesel vehicle users/buyers."

Reddy was also said to have added that in 2011-12 diesel consumption surged by 7.2 per cent, up 1 percent from 2010-11. Petrol sales, however, suffered a major setback with a decline to 5.5 percent from the previous 10.7 percent recorded in 2010-11.

The proposed levy has drawn some ire from automakers, who said that the move will negatively affect car sales even further. The auto sector has gone bearish with inflation and high interest rates deferring any prospective purchases.

"Sale of new cars is already slowing. We have cut production of our petrol models in tandem with the changing market dynamics, and any tax on diesel cars would further taper off demand," Maruti Suzuki MD S Nakanishi said to the Economic Times.

Market shares on Wednesday took a hit amid mounting concerns of the prospective excise duty, with the Auto index down by 1.6 percent. Mahindra & Mahindra and Tata Motors were amongst the losers on the BSE index, while Maruthi Suzuki down by 3 percent performed the worst.