Union Budget 2022-23 | Will Budget 2022 Support The Electric Mobility Mission Of India?

Dr. Waman Parkhi Jan 27, 2022

The Auto sector in India is at the cusp of a new era, with the strong entry of electric vehicles (EVs) in personal and public transportation. This is likely to be followed by the adoption of new-age cleaner technologies such as hydrogen cells and of state-of-the-art electronics due to the increasing importance given to passenger safety. The sector is also witnessing the entry of new players with advanced technologies, newer features in their products, challenging the dominance of traditional players in the market. The Government too has launched a slew of measures, directed towards bringing the sector at par with global standards (BS-VI norms and quality control orders) and accelerating the transition to EVs (like PLI scheme, FAME programme, State incentives).

Despite the strong push for EV adoption, the road to making India a strong player in the EV market is full of obstacles. The EV industry often complains that the policies have been framed without considering the nuances of the EV industry, and issues with its supply chain and infrastructure, which would need its own gestation period for its evolution in India.

Lower customs duty rate on EVs and batteries

Presently, the customs duty on import of EVs, whether in CKD/ SKD kits or fully built units is very high (15%-100%) and is the same as applicable to the Internal Combustion Engine (ICE) vehicles. EVs priced above USD40,000 are subject to customs duty at 100%. Since the EVs currently cost more than their ICE counterpart, the USD 40000 limit is crossed by even mid-segment non- luxury EVs. In order to enable faster adoption of EVs over ICE vehicles, the customs duty framework for EVs should be revisited considering the nascent stage of EVs in India and an appropriate gestation period with a lower duty rate should also be allowed.

The Government has been gradually increasing the customs duty rate on core components of EVs such as batteries, motors, etc. in line with its phased manufacturing programme (PMP). However, the actual development of the EV ecosystem is not in line with the Government’s expectation majorly due to unavailability of core raw materials and components in India. The increase in customs duty should be aligned with the actual ( and not forecasted) development of EV ecosystem in India. Duty concessions need to be continued for the sector for a few more years.

Rectification of inverted duty structure on EVs

EVs are subject to GST at 5% rate, whereas goods and services used in manufacturing EVs are largely taxable at 18% or 28%. Higher GST rate on inward supplies creates ‘inverted tax structure’ and leads to input tax credit (ITC) accumulation with the manufacturer of EVs. Further, the refund provisions under GST law are restrictive and allow refund of accumulated ITC only on inputs or raw materials and not on services or capital goods. This leads to significant ITC accumulation for EV manufacturers, with difficulties in liquidating such credit. Therefore, Government intervention is required to address the inverted duty situation for EVs.

Exemption on incentives for EVs

The central and state governments have launched schemes that provide incentives to promote electric mobility in India. The definition of ‘income’ for the purpose of income tax, includes ‘assistance in the form of a subsidy or grant or cash incentive’. Hence such incentives are presently taxed as income. There is also an ambiguity around the GST applicability of such incentives. In the true spirit of bolstering ‘make in India’, such income could be made exempt from any tax levy, subject to specified conditions.

Relaxation in the claim of goodwill depreciation

As the automotive industry shifts towards electric vehicles, business acquisitions are expected to rise. Allowing taxpayers to claim depreciation on goodwill without any embargo on the manner of acquisition would fuel such acquisition deals, thereby creating synergies and economies of scale to help the overall EV growth

Way forward

When the Government launched the ‘Make in India’ programme in 2014, the auto sector was seen as the torchbearer of industrial growth. It was projected that by 2026 the sector would contribute up to 12% of the national GDP (from the then 7.5%), thereby generating 65 million jobs and India occupying third position in the automotive world. The vision also spoke of exports contributing to 35-40% of the production and India moving up the value chain. With this vision, the Union Budget 2022 should focus on creating infrastructure, incentivising utilization of idle capacity, promoting research and development in newer electronics, upskilling the existing workforce to meet challenges of change in composition and technology of automobiles. As the Indian automotive industry looks forward to the transition to cleaner fuels, better safety and improved mobility, the Government needs to bring in more inclusive and holistic tax and regulatory policies, in consultation with all the relevant stakeholders.