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Exclusive | Centre may soon cut tax on hybrid cars to 35 percent

The latest calculations, however, show that with all the steps being taken by the government at present, India would achieve penetration of mere 5 percent over the next five years

December 17, 2018 / 01:22 PM IST

Making its intent clearer towards pushing hybrid cars in India, the government may soon push for a lower goods and services tax (GST) cess of 25 percent on “strong” hybrid cars, taking effective tax rate to 35 percent,  sources have told Moneycontrol.

“The road transport ministry has proposed for a GST rate of 35 percent on strong hybrid cars, down from 43 percent,” a source in the know said.

According to the minutes of the meeting, the government envisions to develop a “positive environment” for EVs for which a multi-pronged approach will be adopted, including pushing down the tax rate.

“The GST rate on EVs have already been reduced to 12 percent as against the GST rates ranging from 28 percent to 45 percent in the case of internal combustion (IC) vehicles. Strong hybrid cars are also capable of reducing the CO2 emissions ... They can be extended some GST benefits of say, 25 percent, as compared to ICE vehicles,” the note from the meeting said.

Thus, the government intends to cut cess on hybrid cars and levy one-fourth cess of the GST. Effectively, a customer will have to pay 35 percent of the base price as tax.

Also read: Electric vehicles: Government raises incentives under FAME-II to Rs 5,500 crore

At present, hybrid cars are taxed at 43 percent (including cess) as compared to electric cars that are taxed at 12 percent. Incumbent ICE vehicles also put under the 43 percent tax bracket. The tax was seen as a big deterrent in the field of hybrid cars, which were being taxed at 30.3 percent before GST was being implemented.

When the GST regime kicked-in from July 1, a uniform rate of GST was prescribed at 43 percent for specified sedans and SUVs. This was relatively lower than the effective rate range from 46.6 percent to 55.3 percent during the previous tax system .

After it was noted that the overall tax incidence had come down after the implementation of GST, the council, in September 2017, decided to hike cess on mid-sized cars by 2 percent, taking the effective GST rate to 45 percent. Similarly, cess on large cars was hiked by 5 percent, taking the total GST incidence to 48 percent while that of SUVs by 7 percent to 50 percent.

It must be noted that only strong hybrid cars will be taxed at lower GST rate whereas mild hybrids will continue to attract higher rate.

There are three categories of battery based vehicles namely hybrid electric vehicle (HEV), plug-in hybrid electric vehicle (PHEV) and battery electric vehicle (BEV). While BEVs are operated only by battery, PHEV and HEV use combination of battery and ICE.

“The road ministry has proposed to reduce tax on PHEVs,” the source said.

The decision, which was taken at a meeting called by National Institution for Transforming India (NITI) Aayog to decide the roadmap for future mobility in the country, was attended by officials from ministries of road transport, petroleum and natural gas, non-renewable energy, power, department of commerce, department of revenue and department of science and technology.

Also read: Centre to soon subsidise hybrid cars: Report

The ‘Committee of Secretaries’ opined electric vehicles are “expensive and beyond the purchase preference of potential users” which requires bringing down the prices.

“A smooth progression towards electric mobility is the right way for the future… A collaborative approach can help to accelerate e-mobility in India in a sustainable manner,” the committee observed.

Another source aware of the matter said that while there was no discussion as to when the proposal could be sent to the GST council, officials from the finance ministry were “positive” about the proposal.

India has seen a major shift towards electric vehicles over the last few years. Policy corridors have been abuzz with the idea and have been formulating various policies to push electric mobility in the country.

Last year, union minister for road transport and highways, Nitin Gadkari said that his department would “bulldoze” all the ICE vehicle manufacturers if they fail to convert to electric cars. He had said that by 2030 India would have all-electric fleet on its roads.

Later on, however, it was decided that Centre would try to convert 30 to 40 percent of its vehicular count to electric in little over a decade. The latest calculations, however, show that with all the steps being taken by the government at present, India would achieve penetration of mere 5 percent over the next five years.

While policy decisions were being taken to promote electric cars in India, the government underscored its intent to have a gradual shift towards alternate mobility, during MOVE global transportation summit, by moving from ICE to hybrid to electric.

During the summit, Gadkari asked auto-majors to “to shift to electricity or alternate fuels like ethanol, methanol, bio-diesel or hybrid”.

Recently, it was reported that the government was also planning to earmark Rs 13 crore subsidy for the manufacturing of hybrid cars. Sources said that a meeting was held on August 23 which decided to incentivise “potential buyers of 10,000 hybrid cars fitted with lithium-ion batteries of 0.5-2 kilowatt hour (kWh)”.

Also read: Exclusive | First phase of FAME to get six month extension; revised phase-II to kick in from FY20

At the latest meeting, held on December 13, the committee decided to adopt a three-pronged approach comprising “driving demand for EVs, increasing supply volumes and creating a positive ecosystem for EVs”.

“The committee has decided to divide work among various ministries… While NITI Aayog will be responsible for laying down definitive policy for EVs and time-framework for transmission, Road transport ministry along with state transport department will be responsible for creating favourable ecosystem, stimulating EV market and nudging aggregators to induct EVs on incremental basis,” sources said.

Previously, Centre had earlier earmarked Rs 5,500 crore as subsidy for manufacturing of electric vehicles under the second phase of Faster Adoption and Manufacturing of (hybrid and) Electric cars (FAME) scheme. This comprised Rs 4,500 crore to subsidise the manufacturing of EVs and Rs 1,000 crore for setting up of charging stations.

This was, however, put on hold after PMO asked various ministries to look at ways to make cheaper batteries available. Batteries used in EVs are imported and make up for 40 percent of the cost component. For now, FAME-I has been extended till March 2019.

According to Society of Manufacturers of Electric Vehicles (SMEV), 56,000 units of electric vehicles wee sold last year. the number is expected to double this fiscal to touch about over one lakh units.

The reasons for low adoption include significant affordability gap and low level of consumers’ acceptance, low level of electric vehicle manufacturing activities (i.e. lack of supply), lack of comparable products (especially in the two-wheelers category) and non-existent public charging infrastructure.
Nikita Vashisht
first published: Dec 14, 2018 03:07 pm