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GST rate cuts on electric vehicles to boost its manufacture

The GST Council, on June 27, reduced the rate on EVs from 12 percent to 5 percent and on EV chargers from 18 percent to 5 percent, effective from August 1.

July 27, 2019 / 08:16 PM IST
Representative image
Representative image

The government’s decision to sharply cut the GST rate on electric vehicles (EVs) and its chargers had brought cheer to the India’s fledgling EV industry, as they expect the move to make EVs affordable, and thereby boost the demand.

The GST Council on June 27 reduced the rate on EVs from 12 percent to 5 percent and on EV chargers from 18 percent to 5 percent, effective from August 1.

Also read: EVs get a tax boost as GST rate slashed to 5% from 12%

The GST Council also approved exemption from GST on hiring of electric buses by local authorities.

"Mahindra has many EV projects in progress. We will review immediatelyto see if we can fast forward some of them. We will also look at faster ramp up of capacity", said Pawan Goenka, managing director, Mahindra & Mahindra


The government said that the loss of revenue due to the rate cut isn’t going to be not more than Rs 60-70 crore.

"The government is lately showing very clear intentions of promoting EVs and GST reduction is one such measure in line with the series of actions taken by the government in the last few months,” said Sohinder Gill, Director General, Society of Manufacturers of Electric Vehicles (SMEV).

“We welcome the 7 percent reduction in GST as it will reduce the gap between the EVs and the IC (internal combustion) engine vehicles. If FAME 2 was a dampener, the GST reduction is certainly a bright spot in the National EV policy,” Gill added.

SMEV said it now awaits the corresponding reduction of the 18 percent GST in the spare batteries to help maintain the low running cost of EVs over their lifetime.

"The lowering of the GST rate on electric vehicles (EV) from 12 percent to 5 percent is definitely going to give a boost to EV’s in India and we are confident that that it will motivate customers looking for both entry-level EVs as well as luxury EVs that will enter the market. We are pleased that this coincides with our plans for introducing the Audi e-tron in India by the end of this year" said Rahil Ansari, Head, Audi India.

The Economic Survey 2019 pointed out that the current market share of electric cars is only 0.06 percent in comparison to 2 percent in China and 39 percent in Norway.

In India, electric two-wheelers have been the major part of EV sales, with  54,800 such vehicles sold out of the total two crore two-wheelers sold in 2018.

Analysts say the GST rate cut will motivate people to opt for EVs.

“This is significant rate cut, it will incentivize consumers to buy more EVs,” said Pratik Jain - Partner, National Leader, Indirect Tax, PwC India to CNBC-TV18

"The reduction of tax rates on electric vehicles and chargers is a welcome addition to the slew of incentives given to the EV industry in this year’s Budget,” said Mekhla Anand, Partner at legal firm Cyril Amarchand Mangaldas.

“The government appears to be committed to its goals of clean India by promoting alternatives to fuel based automobiles as well as public transportation. It is hoped that the rate reduction would also provide the necessary motivation for increasing the manufacturing base in India," Anand said.

India has committed to cut its greenhouse gas emissions below its 2005 levels by 2030, which would mean a reduction of around 33 to 35 percent.

India has also set a target to add 175 GW of capacity through renewable energy by 2020, and achieve 40 percent of its electricity generation from non-fossil sources by the same year. Given that it needs to import oil to cover over 80 percent of its transport fuel, and the rising demand for imported oil widening the current account deficit, there is strong motivation to switch to EVs to reduce our dependence on fossil fuel for transportation.

The Finance Minister Nirmala Sitharaman, in her maiden Budget, had proposed an income tax deduction of Rs 1.5 lakhs on interest paid on loans taken for EVs.

The government also announced the second phase of the FAME (Faster Adoption and Manufacturing of Electric vehicle) from April 1, with an approved budget of Rs 10,000 crore. The FAME 2 scheme will be implemented for a period of three years, and will offer exemption from road tax and registration charge for hybrids and EVs, in addition to create nation-wide charging infrastructure which is crucial for the EV ecosystem to thrive.

The government think tank NITI Aayog is also said to be working on a proposal to ban two-wheelers with less than 150cc internal combustion engines, and three-wheelers by 2025 and 2023.

Concerns of states

But some states like Punjab, Delhi and West Bengal have expressed concern over loss of revenue due to EV rate-cut proposals.

“It’s a hurried decision,” said Manpreet Singh Badal, Finance Minister of Punjab to CNBC-TV18, referring to the GST rate cut on EVs.

“The proposal may help manufacturing states, not destination states like Punjab,” Badal said.

“Our share of taxes will come down to 2.5 percent,” he added.

Badal also expressed reservation on whether promoting EVs would lead to any meaningful reduction in emissions, as much of the electricity in India is generating from coal.

“The focus of the government should be reviving the automobile industry, which is in deep recession,” Badal said.

Demand for tax breaks by the auto industry

The Indian auto industry, which is the world's second largest maker of conventional automobiles based on internal combustion engines in terms of volumes, is trying to catch-up with the push for EVs.

Most Indian companies including Tata Motors, Mahindra & Mahindra, Hero Motor Corp, TVS, Bajaj Auto, among others have been investing heavily in the development of EVs.

But the pace has been gradual due to lack of demand and a favorable policy environment.

Adding to the challenge of transition to EVs, Indian auto makers are faced with weakening sales due to BS VI transition and general slowdown of consumption in the country.

The Indian automobile industry, which has represented by Society of Indian Automobile Manufacturers (SIAM), has been pressing the government to announce some relief package in form of tax-breaks to tide over the distress the industry has been going.

The government charges 28 percent GST on petrol and diesel vehicles.

Some members of the Indian automobile industry has been warning the government to not rush ahead with the EV transition. Rajiv Bajaj, MD of Bajaj Auto, in an interview to a business newspaper, said that any hasty moves would benefit traders rather than the manufacturers who make in India.

Jain said the government should also consider providing relief to the automobile industry through tax-breaks, on a select hybrids  and petrol cars for at least a brief period to generate demand.
Swaraj Baggonkar
Viswanath Pilla is a business journalist with 14 years of reporting experience. Based in Mumbai, Pilla covers pharma, healthcare and infrastructure sectors for Moneycontrol.
Prince Mathews Thomas heads the corporate bureau of Moneycontrol. He has been covering the business world for 16 years, having worked in The Hindu Business Line, Forbes India, Dow Jones Newswires, The Economic Times, Business Standard and The Week. A Chevening scholar, Prince has also authored The Consolidators, a book on second generation entrepreneurs.