At a recent media conference, the Minister of Road Transport and Highways, Nitin Gadkari, urged the finance minister to consider a reduction in GST for passenger vehicles that use hybrid technology.
He proposed decreasing the current rate of 28 per cent to 12 per cent (including cess; tax rates on domestically manufactured cars go up to 43 per cent). This set the automotive industry abuzz. However, with the Model Code of Conduct enforced ahead of the 2024 Lok Sabha elections and no GST Council meetings anticipated until at least late June, it’s unlikely that this will happen soon. But if this proposal does go ahead, it would make hybrids much more attractive for buyers and potentially impact battery electric vehicles that have a GST rate of five per cent currently.
Automotive companies and those who observe the industry, however, continue to wonder why this announcement was made at this time. It was preceded by the Government releasing a new EV policy for passenger cars, ostensibly to promote EV manufacturing in India before the MCC was announced. The single-page note was thin on details but properly outlined the conditions for companies making substantial investment commitments.
According to Business Today, “the government will lower import taxes on certain electric vehicles for companies that commit to at least $500 million in investment”. This is in addition to requirements to have 25 per cent Domestic Value Addition (DVA) in year three and 50 per cent DVA in year five that would allow the investing company to import 40,000 vehicles (at a customs value of $35,000 or less) at the rate of 8,000 vehicles per year for five years. These imports would be subject to a much-reduced customs rate of 15 per cent (compared to 70 per cent otherwise).
Decoding the government’s moves
After speaking to several auto companies, I learned that the sub-text for this policy was to attract Elon Musk-headed Tesla Motors, the world’s most profitable EV maker, to India. “This policy will need to be accounted for in the Budget. A duty reduction of this scale would mean a notional duty loss of Rs 6 lakh per vehicle. However, companies that have taken advantage of the already budgeted Performance Linked Incentives (PLI) for electric vehicles will not be eligible for this. And I seriously doubt that the government will open this scheme up for Chinese manufacturers either”, the Government Affairs and Policy honcho of a leading car manufacturing company told me. Incidentally, the leading Chinese carmaker Shanghai Automotive Industrial Corporation (SAIC), which sells cars under the MG Motors brand in India, announced a joint venture with the Sajjan Jindal-led JSW Group, which will focus on ‘new energy vehicles’ (NEVs) including battery-electrics and hybrids.
Many say that the push to reduce tax rates on hybrids has been influenced by the country’s largest carmaker, Maruti-Suzuki India Limited (MSIL), which collaborates with Toyota, the world’s largest automobile manufacturer and a leader in Hybrid technology. But there are a lot of caveats because there is no ‘one’ hybrid technology. When the Government of India introduced the FAME (Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India) scheme, Maruti-Suzuki introduced the ‘mild hybrid’ technology on the Ciaz and Ertiga. But this was essentially a slightly larger battery and an Integrated Generator Starter (IGS) that allowed for ‘Start-Stop’ operation at traffic signals and the like. This wasn’t ‘new’ technology by any stretch and a ‘strong’ hybrid uses either the engine or the battery (or sometimes both) to run the vehicle. Maruti’s sleight of hand might have irritated the government, which not only removed the Ciaz and Ertiga from the eligibility list but also barred any and all hybrids from subsidies.
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Demand for hybrids
The government soured on hybrids, but Indian consumers didn’t, especially as ‘strong hybrids’ started entering the market. As written in the past, demand for the new, hybrid-technology-equipped Toyota Hycross and its Maruti equivalent, Invicto has shot through the roof. I spent a considerable amount of time with the Honda City e: HEV hybrid in 2022 and achieved stunning fuel efficiency figures. While hybrid cars are more expensive than their purely internal combustion engine stablemates, the City e: HEV costs Rs 4 lakh more than its pure-petrol counterpart at the same trim level. It is over 50 per cent more fuel-efficient in the real world.
Honda claims their Hybrid technology is more advanced and also throws in Advanced Driver Assistance Systems (ADAS) in their vehicle. But the Maruti-Suzuki Grand Vitara Hybrid is Rs 3 lakh more expensive than its pure-petrol counterpart. Ergo, there is a substantial premium to pay. When I drove the vehicle for over two months, I achieved a fuel efficiency touching almost 23 kilometers per litre. Speaking to those who own other hybrids such as the Innova or Grand Vitara, they are equally astounded by the vehicle’s efficiency. However, to maximise the additional investment, given the current prices of petrol in India, a hybrid would need to be driven 15,000 kilometres a year for five years. If GST rates are brought down for hybrids, the price difference could be just Rs 1 lakh and that would change the game completely.
Now, into the picture come ‘Plug-In Electric Hybrid Vehicles’ (PHEV). These are more interesting and a proper evolutionary link between the internal combustion engine and battery-electric vehicles (BEV). As the name suggests, these cars can be plugged into a vehicle charger and while they have much smaller batteries compared to a BEV, those available on sale abroad (there are no PHEVs in the Indian market currently) easily achieve a fully electric range of 60-100 kilometres. It is more than enough for the average daily urban commute. And owners don’t need to worry about range as they have a petrol or diesel engine for those longer highway drives.
Of course, how efficient a PHEV or any strong hybrid is depends on the size of the battery and even the type of technology being used. Gadkari’s comment on a GST reduction is welcome because if the objective is to cut fuel imports and carbon emissions, hybrids are a more cost-effective solution than EVs. I repeat, I have nothing against EVs; I really enjoyed driving the Hyundai IONIQ5 as my long-term vehicle until recently. I also found the Tata Punch EV to be a fantastic vehicle, but even at reduced GST rates, these cars are expensive. EVs will dominate the private two-wheeler and commercial three/four-wheeler market, but in the private four-wheeler segment, hybrid technology will be a great, cost-effective solution, despite a more complicated manufacturing process.
A single GST rate for hybrids will not be ideal, though. India should adopt a progressive GST rate for passenger cars, one that ignores engine and vehicular size unlike current rules and is based on tailpipe emissions. Several European countries follow this model and measure not just carbon gases from the tailpipe but other emissions like nitrogen oxides (NOx) and particulates.
As rates go progressively higher, emission-free battery electric or hydrogen-powered cars in the future would pay the lowest rates. Rates for hybrids would vary based on factors like bigger batteries. More advanced PHEVs would pay a lower rate than vehicles with cheaper and less advanced technology. At the same time, this would penalise pure internal combustion engine (ICE) vehicles. Cars with small, efficient turbocharged engines (like the Citroen C3) would pay a lower rate and performance cars (like Mercedes-Benz AMG cars) would pay a higher rate. Diesel vehicles running on large engines would pay the highest rate. Such a policy would not outright ban any vehicles but be a sensible one since those willing to pay for ICE performance would pay a higher portion to the government.
Such a plan would require the government not to make an ad-hoc policy as has been the case in India since such policies can easily be gamed by manufacturers. This is what happened with electric two-wheeler subsidies under the FAME policy. Government and sensible policymaking do not have to be mutually exclusive terms. Given that bureaucrats and policymakers have a few months to plan before a new government is sworn in, they could consider drafting a smart policy that encourages lower-emission vehicles and protects Indian manufacturing.
@kushanmitra is an automotive journalist based in New Delhi. He is one of the jury members on the ICOTY panel. Views are personal.
(Edited by Zoya Bhatti)
