India is poised for a transformative shift in its transportation landscape. The escalating challenges of air pollution, burgeoning fuel imports, and rising carbon emissions necessitate an urgent transition to cleaner, more sustainable mobility solutions. Electric Vehicles (EVs) have emerged as a compelling alternative to conventional fossil-fuel-powered vehicles, offering substantial reductions in emissions and enhanced energy security. Fiscal policy, particularly taxation, plays an instrumental role in catalysing EV adoption. By deploying judicious tax incentives, subsidies, and progressive fiscal strategies, India can accelerate its journey towards an electrified future.

1. The Imperative for Electric Vehicles in India

India faces the dual exigency of mitigating air pollution and ensuring energy security. Urban centers are grappling with deleterious emissions from conventional vehicles, underscoring the necessity for EVs as a cleaner, more viable alternative. The transportation sector contributes significantly to greenhouse gas emissions, with over 90% originating from fossil-fuel-powered vehicles.

While the benefits of EVs are unequivocal, challenges such as exorbitant upfront costs, nascent charging infrastructure, and limitations in battery technology persist. For instance, lithium-ion battery prices constitute 35-40% of an EV’s total cost, presenting a formidable affordability barrier. A multifaceted approach encompassing government intervention, industry collaboration, and consumer education is imperative. Taxation policies serve as a linchpin in fostering a sustainable EV ecosystem.

2. Taxation as a Catalyst for EV Adoption

Taxation policies wield significant influence over market dynamics and consumer behavior, thereby promoting sustainable practices. Key measures include: 

a. GST Reforms on Electric Vehicles

The Government of India continues to take significant strides in promoting electric vehicles (EVs) as a sustainable transportation option. In its 55th meeting, the GST Council cleared a longstanding ambiguity around the taxation of used EVs, providing much-needed clarity. The decisions aim to streamline the tax structure for individual and business sales, contributing to the growing momentum of EV adoption.

1. GST Rates on EV Products and Services

India has been steadily revising GST rates on EVs and related services to make them more accessible. The current GST rates stand as follows:

Table 1: GST Rates on EV Products and Services

The significant disparity between GST rates on EVs and internal combustion engine (ICE) vehicles highlights India’s commitment to a greener transportation ecosystem. 

 2. Key Updates on GST for Used EVs

The GST Council’s latest update simplifies the taxation framework for used EV sales:

• • Individual to Individual Sales: No GST will be charged when an individual sells a used EV to another individual.
  • Business Sales Post-Refurbishment: Businesses selling refurbished EVs will incur GST at 18%, calculated on the margin value (purchase price minus sale price), aligning with existing rules for used vehicles.

 Table 2: GST for used EV  

 This clarity reduces uncertainty for businesses and encourages sustainable practices, such as refurbishing and reselling EVs. 

3. Impact on EV Affordability

The reduced GST rates on EVs have made them considerably more affordable for consumers. Let’s compare how GST affects the purchase price of an EV versus a petrol/diesel vehicle priced at ₹10,00,000:

Table 3: GST comparison for EV and Petrol/diesel Vehicle

The shift from 12% to 5% GST on EVs translates to a direct saving of ₹70,000, while choosing an EV over a petrol or diesel car can save ₹2,30,000 in taxes. These numbers underscore the financial incentives for EV adoption.

b. Income Tax Deductions (Section 80EEB)

Under Section 80EEB, individual taxpayers can avail deductions of up to INR 1.5 lakh on the interest paid on loans for EV purchases. While this measure alleviates ownership costs, its scope is restricted to loan-financed buyers, leaving outright purchasers unaddressed. Expanding this incentive to encompass all buyers could significantly enhance adoption rates.

c. Customs Duty Exemptions

To stimulate domestic EV manufacturing, customs duties on key components such as lithium-ion cells have been waived. However, with over 70% of lithium-ion cells still being imported (as of 2022), fostering local production remains imperative. Initiatives like the INR 18,100 crore Production-Linked Incentive (PLI) scheme are pivotal in bridging this gap by incentivizing advanced battery manufacturing.

 d. State-Level Incentives

State governments have emerged as pivotal players in advancing EV adoption through tax exemptions, subsidies, and infrastructure investments. Examples include:

• Telangana: Waived 100% road tax and registration fees for EVs and introduced incentives for battery-swapping stations.
• Delhi: Offered substantial purchase subsidies and incentivized ride-hailing services to electrify their fleets, resulting in a 30% rise in electric fleet vehicles in 2023.
• Gujarat: Extended one of the most generous subsidies for two-wheelers and three-wheelers, enhancing EV accessibility in both urban and rural areas.

3. Challenges and Opportunities in the EV Market

Despite the progress, the EV industry in India still faces hurdles. Addressing these challenges could unlock new opportunities for growth:

Table 4: EV related Challenges & Opportunities

 While challenges remain, targeted government policies and incentives are paving the way for a brighter future for EVs in India.

4. Strategic Recommendations to Amplify Taxation’s Impact on EV Adoption 

1. Expand Production-Linked Incentives (PLI)- The government’s PLI scheme for advanced battery manufacturing is a laudable initiative. Expanding these incentives to encompass EV-specific components such as power electronics and electric drivetrains could further bolster domestic production.
2. Standardize GST on EV Components- Reducing GST on critical components, such as batteries and powertrains, to 5% can significantly enhance affordability. A uniform GST structure across the EV supply chain would streamline costs and improve pricing predictability.
3. Facilitate Fleet Electrification- Targeted tax incentives for fleet operators, including ride-hailing companies and public transport providers, could drive large-scale EV adoption. Delhi’s policy for fleet electrification has demonstrated the efficacy of such measures.
4. Foster Public-Private Partnerships (PPPs)- Collaborations between the government and private stakeholders can expedite infrastructure development. For instance, Tata Power’s initiative to establish over 1,000 charging stations exemplifies the potential of PPPs when supported by tax incentives.
5. Promote Battery Swapping and Leasing Models- Battery-swapping and leasing mechanisms can address high upfront costs by allowing consumers to pay only for battery usage, thereby reducing initial investments.
6. Encourage Recycling and Second-Life Battery Applications- Tax incentives for recycling facilities and second-life battery applications can promote sustainability while mitigating costs. This aligns with India’s broader circular economy objectives.

5. The Road Ahead

India’s efforts to make EVs more affordable through lower GST rates, combined with government incentives, have already started showing results. Sales of EVs grew by an impressive 91% in FY 2023-24. However, challenges such as high battery costs and limited infrastructure need to be addressed to sustain this growth trajectory.

The reforms announced by the GST Council mark a pivotal moment for India’s EV industry. With continued policy support and private sector collaboration, India is well-positioned to lead the transition to sustainable transportation.