BACKGROUND
Electric Vehicles (“EVs”) have emerged as a cornerstone of sustainable transportation, promising to mitigate pollution and foster green mobility. An EV utilizes battery cells as its power source, comprising a rechargeable battery pack, a battery management system (BMS), an electric motor, and other electronic components.
While many vehicles in use today operate on internal combustion engines (ICE), EVs utilize a battery pack to provide power to the electric motor, which in turn rotates the wheels.
In India, the EV sector has gained momentum, supported by government initiatives and increasing consumer awareness. The forthcoming budget is anticipated to introduce tax reforms that could significantly bolster the EV manufacturing landscape.
CURRENT DEVELOPMENT OF EV
A significant portion of India’s vehicle market consists of two- and three-wheelers, which account for approximately 80% of total vehicle sales. Of the 250 million two- and three-wheelers currently on Indian roads, only one million are electric. However, in the fiscal year 2022-23 alone, registrations of electric two- and three-wheelers surpassed one million, with electric two-wheelers comprising 62% of EVs sold.
India has set a target to achieve a 30% sales share for EVs by 2030. Various reports indicate that the two- and three-wheeler segments will spearhead the transition to electric mobility in India by 2030. According to the NITI Aayog, the sales share of electric two- and three-wheelers will reach 86%, while electric four-wheelers will account for 13% by 2030.
Furthermore, the Economic Survey of India 2023 projected a robust Compound Annual Growth Rate (CAGR)) of 49% in the domestic electric vehicle market from 2022 to 2030, with an estimated annual sales volume of 10 million by 2030. Projections also indicate that the EV industry will generate approximately 50 million direct and indirect employment opportunities over the next seven years.
GOVERNMENT INITIATED TOWARD EV
- Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (“FAME”)
The Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME) Scheme was inaugurated in April 2015 to foster the market and manufacturing ecosystem for electric and hybrid vehicles. The scheme’s second phase commenced in April 2019 with a budget allocation of Rs 10,000 crore over three years. Its objectives include funding the procurement of 7,090 electric buses, 55,000 four-wheeler passenger cars, 500,000 three-wheelers, and 1,000,000 electric two-wheelers.
- Production-linked Incentive (PLI) Scheme for Automotive Industry
Launched in September 2021, this initiative has an outlay of ₹23,400 crore aimed at promoting domestic manufacturing of Advanced Automative Technology (AAT) products and attracting investments within the automotive manufacturing value chain. It has attracted proposed investments amounting to ₹67,800 crore, significantly surpassing the target estimate of ₹38,600 crore over a period of five years.
- National Program on Advanced Chemistry Cell Battery Storage
Launched in 2021 with an outlay of ₹15,800 crore over seven years, including a two-year gestation period, this Production-Linked Incentive (PLI) Scheme aims to enhance India’s manufacturing capabilities for Advanced Chemistry Cell (ACC) production. Incentives will be disbursed over five years based on the sales of domestically manufactured batteries. Currently, three companies have been selected with a combined manufacturing capacity of 30 GWh, and the second phase of the scheme is set to be launched soon.
- GST Reduction
With the aim to expand the market for EV, the government of India reduced GST from 12% to 5% for all EV in the segment such as two-wheeler, three-wheeler, four wheeler and commercial vehicle. Moreover, the government has reduced the GST of EV chargers 12% to 5% and EV charging stations 18% to 5% to increase the demand and set up EV ecosystem.
EXPECTED TAX REFORM IN THE UPCOMING BUDGET
The EV industry in India has seen remarkable growth in 2024, marking a pivotal year in its development. Despite encountering challenges in government policies and business prospects, EV registrations have shown significant growth. As the government prepares to unveil this year’s budget, the industry is optimistic about potential major announcements and policy revisions aimed at further fostering growth.
- GST Standardization-
Electric vehicle manufacturers currently face a disparity in Goods and Services Tax (“GST”) rates, with a 5% GST levied on vehicle sales contrasted by an 18% GST on batteries and related services. Batteries constitute a significant 40% of the overall vehicle cost, impacting working capital from cell procurement to integration into vehicles.
In the previous Union Budget, the Indian government underscored its commitment to lithium-ion (Li-Ion) cell manufacturing by extending customs duty exemptions on essential capital goods and machinery. This initiative aimed to bolster domestic production of Li-ion cells crucial for EV batteries.
In the upcoming Union Budget 2024, the Government of India is anticipated to reduce the GST rate on batteries and associated services from 18% to 5%. This measure is expected to lower the manufacturing costs of EVs significantly, fostering advancements in battery technology and the expansion of charging networks. Such a step is poised to cultivate a comprehensive EV ecosystem in India, stimulating local manufacturing capabilities and facilitating broader adoption of electric vehicles across the country.
- Increase the Scope of FAME
The Government of India initiated the FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) scheme in 2015 with the aim of reducing reliance on fossil fuels and addressing vehicle emission issues. Under its current Phase II, the FAME scheme has been allocated ₹11,500 crore for a five-year period, supporting the adoption of 1.5 million vehicles. FAME 2.0 has been pivotal in advancing the EV industry in India, despite its significant shortcomings.
However, as FAME 2.0 draws to a close in March 2024, notable criticisms include its allocation, where only 10% of incentives were earmarked for charging infrastructure. This limitation has resulted in a shortage of charging stations and diminished consumer confidence in EVs.
In the 2024 budget, the Government is expected to announce FAME 3.0, potentially addressing these shortcomings by extending subsidies to include charging infrastructure and battery development. Specific provisions such as subsidies and tax benefits aimed at the charging infrastructure sector could significantly expand electric vehicle charging services and expedite the deployment of charging stations nationwide. Such support is crucial for alleviating range anxiety and promoting broader EV adoption in India.
Moreover, anticipated enhancements in funding and streamlined policies for research and development in battery technology and grid integration are expected to further bolster the growth of the charging infrastructure sector. These measures aim to strengthen India’s position in the global shift towards sustainable transportation solutions.
WAY FORWARD
The upcoming budget’s tax reforms are poised to significantly impact EV manufacturing in India, building on the country’s current momentum in the sector. India’s EV market, particularly in two- and three-wheelers, is rapidly expanding, targeting a 30% share of EV sales by 2030 with a projected 49% CAGR from 2022 to 2030. Initiatives like FAME, PLI schemes, and GST reductions have laid a robust foundation for growth by promoting domestic manufacturing and adoption.
Expected reforms include reducing GST on batteries and related services from 18% to 5%, potentially cutting EV manufacturing costs. The introduction of FAME 3.0 is anticipated, extending subsidies to cover charging infrastructure and battery development, addressing current EV ecosystem challenges. These measures aim to boost local manufacturing, enhance charging infrastructure to ease range anxiety, and accelerate research in battery technology and grid integration.
HOW WE CAN HELP?
- Our team of experts can help understand and implement the anticipated GST rate changes, ensuring compliance while optimizing the tax structure.
- We can guide through the intricacies of the FAME scheme, helping maximize benefits under the expected FAME 3.0.
- Our lawyers can draft and review contracts with suppliers and distributors, ensuring they align with new regulatory requirements.
- As a team of professionals, we can advise on optimal business structures to leverage new tax incentives and subsidies.
- We can also assist in drafting and negotiating technology transfer agreements considering new regulations and offer guidance on protecting your EV-related innovations and technologies.
For more information or queries, please email us at
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