[Swaraj is a student at Rajiv Gandhi National University of Law.]
In a recent announcement, the Telangana government decided to offer 100% exemption on road tax and registration fees on the purchase of electric vehicles (EVs), clearly presenting its vision for an all-electric future. With India’s car sales as high as 4.23 million in FY 23-24, this move signals India’s instrumental stance towards green governance. However, a closer look at the realities of this policy reveals that it might be a misstep if hybrid vehicles aren’t given the opportunity to bridge the transition.
India has a uniform tax regime for all internal combustion engine (ICE) cars (conventional fuel cars), including hybrids, hence failing to appreciate that the latter might be a plausible solution to truly realise an all-electric automotive future. Despite their higher fuel efficiency, power delivery, and adaptability, hybrids (vehicles that simultaneously run on both electricity and petrol/diesel) are taxed at the same rate as purely fossil fuel-powered cars, causing an unfair disadvantage. The lack of a separate tax bracket and a one-size-fits-all approach undermines the practicality of the tax policy, making it insufficient to realise its all-electric goal.
The article aims to analyze the existing tax regime under the Goods and Service Tax (GST) Act 2017 (GST Act) and recognise its existing problems in this context. It further presents case studies from around the world, suggesting workable solutions for the same. Following a suggestive tax regime, the article attempts to complement the same with its potential benefits to customers, government, car manufacturers, and investors, concluding on a hopeful note for building an EV-friendly landscape.
GST Act: Shortcomings of the Current Tax Regime
Since the introduction of GST, the government has been proactive in promoting EVs by imposing only 5% GST, as compared to that of ICE cars that are taxed at rates as high as 28% based on their length, engine displacement, and classification as SUVs. In addition to the same, compensation cess and other fees escalate the total taxes to 50%. However, less-polluting hybrids are bearing the collateral damage of heavy ICE taxation, as they are being overlooked as a fit transitional technology.
As per government data, India has only about 16,000 charging stations, most of which lack fast-charging capability. In comparison, South Korea has 3,73,000 of them, most being significantly more efficient. For truly realizing an all-electric future, India requires at least 13.2 lakh charging stations strategically placed across the nation by 2030. Such an insufficient infrastructure hampers the large-scale adoption of EVs not only by customers but also car manufacturers.
Furthermore, the environmental cost of producing EV batteries is catastrophic since mining of lithium, cobalt, and nickel causes severe pollution and human rights violations globally. Moreover, since the primary reason for promoting EVs is preserving natural resources and the environment, it is essential that their charging must be sourced from renewable energy sources. However, with more than 75% of India’s electricity derived from coal, it is evident that EVs actually rely on non-renewable energy sources, defeating their whole purpose and diminishing their environmental benefits.
With such an underdeveloped support system for EVs, the government must primarily focus on formulating an attractive taxation policy for hybrids, while simultaneously developing the requisite EV infrastructure. The current regime not only taxes hybrids unfairly, but also discourages investment, research, and development in their field. In order to create a solid foundation for a better policy, a comparative analysis of EV legislations across the world becomes imperative.
EV Policies: A Global Overview
The global push for EVs underscores several valuable factors and lessons for India to deliberate upon, and are given as follows.
California
The Golden State made the headlines in 2020 for completely banning sale of gas-powered cars by 2035, and planning to replace them with EVs. However, consistent delays in granting permits, constructing, and making charging stations available for public inter alia revealed the poor planning of the policy.
A similar range of issues may arise in India, given its socio-economically diverse demography and a known trend of bureaucratic delays, rendering any EV policy ineffective, rushed, or inadequately planned.
Norway
The similarity between item number 242A of the First Schedule of the GST Act and Norway’s EV VAT notification is apparent, signaling India’s net zero emissions target. The chapter levies discounted GST (with no compensation cess) on EVs, as is done by the Norwegian legislation. Though India aims to bring such a shift in the auto paradigm, it fails to account for the disparity between the 2 countries.
For comparison, India has an economically polarized 1.4 billion-strong population living across diverse driving terrains, while Norway has a smaller population with relatively homogenous distribution of wealth. Even then, Norway’s diesel demand dropped by only 4% in the past 13 years, serving as a testament to the need for transitional technology of hybrids as suggested.
South Korea
A critical analysis of South Korea’s EV policy demonstrates that its gradual approach to EV transition equipped it with 3,73,000 charging stations, backed by strong and influential tech giants like Hyundai-Kia being based domestically. Its high-tech and well-established infrastructure makes it the ideal example for countries to follow.
This was possible primarily due to robust funding and expeditious construction of EV infrastructure, something that is hindered by the lacunae in India’s taxation structure, specifically within Schedule IV of the GST Act, tariff number 8703.
Having established how the current taxation framework of India has a high chance of failing to attain its goal, it can now be ascertained that certain specified exemption-oriented measures can assist a smoother transition to EVs without having to battle the usual logistical hurdles.
Suggestions and Way Forward
To begin with, hybrids ought to be classified as mild, strong, and plug-in hybrids, in the order of efficiency and eco-friendliness. Mild hybrids utilise the heat generated during braking to enhance fuel efficiency. Strong hybrids have larger batteries, and deliver even greater efficiency. Plug-in hybrids blend electric and ICE drivetrains, making them the most eco-friendly since they emit zero carbon when run on electricity. Being less polluting than ICE engines, hybrids require lower GST and cess rates to appropriately reflect their low environmental costs.
This could be done for all three categories of hybrids separately, since they exhibit remarkably distinct efficiency merits. An amendment to that effect could be introduced in Schedule IV of the GST Act, specifically chapter / tariff number 8703, by enlisting the following 3 items, while a multidisciplinary approach involving economic and environmental impact assessment could be useful to arrive at the exact percentages for the categories given as under.
Plug-in hybrids could be granted the highest exemption, quantitatively close to that of EVs, placing them nearly at par with Schedule-I rates. Strong hybrids, owing to their commendable green metrics, could qualify for a relatively lower exemption, followed by an even lower exemption for mild hybrids. Here, an analysis of Karnataka’s upcoming EV-hybrid tax policy could be beneficial, since it is setting the stage for implementing tax exemptions for EVs and hybrids simultaneously.
Furthermore, India’s pro-exemption tax policy for hydrogen-fuel-cell vehicles has facilitated the manufacturing of futuristic yet sustainable vehicles like Tata’s hydrogen-fuel-cell vehicles. This demonstrates how attractive tax policies could actually stimulate development within untapped research fields in the automotive sector, potentially enabling the domestic development of highly-capable solid-state batteries, thereby making EVs even more sustainable.
Today, in the absence of adequate charging stations, even with such attractive tax rates, the common man is compelled to pay relatively high taxes and buy an ICE car. But if the suggested regime for differentiated taxation within hybrid cars is implemented, consumers would be more inclined to purchase these vehicles instead of pure ICE cars. This would not only work in the favour of consumers since they now have more choices, but also grant the government the requisite funds and time to build the infrastructure necessary for an all-electric automotive future.
Furthermore, the resulting market diversification would enable more investment, allowing the government and investors to benefit from incoming revenue and the benefits arising thereof respectively. Additionally, with such a market set in motion, the ambit of tax laws is bound to grow exponentially.
Conclusion: Charting India’s Green Automotive Path
With attractive tax exemptions on EVs and online portals identifying nearest charging stations, the government has made remarkable strides in promoting EVs and ensuring environmental preservation. However, fully electrifying the future of the automotive industry necessitates specifically-targeted tax reforms to ensure a phased, gradual, and sustainable transition.
Granting categorised exemptions on hybrids could act as pull-factors to catalyze domestic and foreign investment in their R&D, impelling innovation in the development of efficient and eco-friendly transport systems. Such incentives would reduce environmental costs, enhance market competition, and align the automotive market parallelly with India’s net-zero emissions target. Furthermore, the separated-tax model for hybrids would strategically accommodate them as transitional technology, widening the purview of the GST Act.
While advancements in hydrogen-powered vehicles and solid-state EVs are progressively promising, hybrids remain as the most commercially viable measure until India establishes a robust EV infrastructure. Thus, a revised and accommodating tax regime could better sustain such a technological evolution while paving the way for market equilibrium and environmental protection.
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