A tax cut with unintended impact for India’s EV momentum, ETCFO
The Indian electric vehicle (EV) sector, particularly the small car and hatchback segment, may soon face a speed bump. The proposed goods and services tax (GST) recast could boost the small passenger car market. Small cars are likely to be placed in the 18% tax slab, substantially reducing the tax burden on them, as per a recent ET report based on information from sources. Small cars of 4 metres and less in length and engine capacity up to 1,200 cc (petrol, CNG and LPG) now attract 28% GST and 1% cess. Large cars and SUVs are likely to face the special rate of 40%, sources told ET. Currently, these vehicles attract 43-50% tax, which includes GST and cess. There will likely be no change in the GST rate for electric vehicles (EV), currently at 5%, the sources said.The tax recast, if it indeed results in such major cuts in taxes on small cars and hatchbacks, can have an unintended impact. Electric cars, particularly small ones and hatchbacks, will lose a substantial edge over ICE (internal combustion engine) cars.
A recent report by HSBC Investment Research says EV manufacturers might face a competitive setback with such a tax recast. While ICE vehicles will get a boost with lower prices, it would also undercut the price advantage of EVs, potentially slowing their adoption in India.
India’s GST framework is a key policy tool in shaping consumer choices in the automotive sector. The current GST rate for small ICE cars is 28%, with additional cess in some cases, while EVs enjoy a much lower GST of just 5%, a policy crafted to promote clean mobility and reduce oil dependence and urban pollution. This tax differential has been one of the major demand drivers for EVs in India, especially in the cost-sensitive small car segment. A reduction in GST for ICE cars, particularly in the entry-level category, will alter the total cost of ownership equation and potentially reverse some of the recent gains made by electric hatchback models.
India’s electric cars are on a high growth path
Though India has made big strides in the EV sector, its electric cars are still at a nascent stage. Electric passenger vehicle retail sales jumped 93 % year-on-year in July, led by Tata Motors, as per the Federation of Automobile Dealers Associations (FADA). Total electric passenger vehicle registrations rose to 15,528 units last month as compared with 8,037 units in the year-ago period, it said. However, these sales are dominated by vehicles other than cars. EV growth in India has been led by two and three-wheelers that accounted for 86% of the over six million EVs sold last year. Sales of four-wheel passenger EVs made up only 2.5% of all car sales in India last year, but they have been surging, jumping to more than 110,000 in 2024 from just 1,841 in 2019.India aims to achieve a 30% share of electric vehicles in total vehicle sales by 2030. As per the Aayog, with 18.78 million EV sales in 2024 or just 7.6% of total vehicle sales, the country needs to accelerate significantly to meet its 2030 targeting which will require an increase of over 22% in the next five years. The overall EV sales bump will of course help electric cars too especially when so many attractive, in terms of looks, efficiency and price, have started flooding the market.
The share of electric vehicles in new car sales expanded at a rapid pace in the first five months of this calendar year, as new products from automakers such as Tata Motors, Mahindra & Mahindra, MG Motor and Hyundai boosted sales that had slowed down the previous year. EVs accounted for 3.7% in the January-May period, compared with 2.2% in 2023, show industry data. Automotive industry insiders have told ET the launch of new EV models with longer range and enhanced features, expansion of charging infrastructure and a reduction in price differential with fossil fuel-powered vehicles have boosted demand for electric vehicles in India.
Customers now have more vehicles to choose from; as many as 16 EV models are currently available to purchase, compared with 10 in 2023. While several of the new vehicles travel a longer distance than the older models on a single charge, the number of charging stations has more than doubled to 26,311 from 12,146 in the same period, as per Bureau of Energy Efficiency data, reducing range anxiety. Industry executives predict the growth to pick up in coming years.
Will the GST recast slow down electric cars?
Though electric cars are on a high growth path, the challenges still remain formidable. The share of electric vehicles in overall car sales has inched up in the last six months, but customers are opting for them largely as second or third vehicles limiting widespread adoption in the local market, a top executive at the country’s largest carmaker Maruti Suzuki has said. Partho Banerjee, senior executive officer, marketing and sales, Maruti Suzuki, said, “The share of electric cars in total sales of passenger vehicles increased to 4.5% (in July) from about 2.5% last year. But the base is still small. Customers are mostly buying EVs as second or third cars, not as the first one. It is a chicken-and-egg situation, till the time an adequate public charging network is in place, customers are unlikely to use electric cars as a primary vehicle.” Low utilisation of public charging stations, on the other hand, makes it difficult for operators to invest in further expansion.
While Maruti Suzuki is focusing on setting up charging networks to smoother intra-city commute for customers, Korean rival Hyundai has announced plans to beef up the number of charging stations on major highways to make hassle-free inter-city travel for EV owners.
However, despite efforts to boost electric car adoption, the segment is still at a nascent stage. A tax roadbump can stymie its pace of growth.
Electric car manufacturers may find it hard to enjoy as much price premium as their vehicles currently command. Entry-level car segment is extremely price-elastic. A 5% to 8% swing in final pricing can tilt purchasing decisions significantly especially when entry-level buyers are more conscious about limitations of electric cars. Also, many entry-level EVs compromise on range, features or performance compared to their ICE counterparts. If price parity narrows, consumers may lean towards more familiar ICE models. Despite lower running costs, the higher upfront cost of EVs has remained a barrier for mass adoption. A smaller tax differential might reduce the financial incentive for choosing an electric car.
While the possible GST cut on ICE small cars will be very much beneficial for mass consumers as well as the broader automotive industry when India needs to spur consumption as well as economic growth, it might undercut the nascent electric car industry as an unintended consequence.
Yet, at a time when India is building an ecosystem of battery manufacturing, charging infrastructure and supply chain localisation, and competition hardens between electric car makers, EV policy incentives are likely to phase out or stagnate because a developed EV landscape will result in better economic and price efficiencies. However, the possible tax differential resulting from the GST recast might impact growth in the immediate future as the HSBC report points out.
