Electric vehicle (EV) makers in India may face a slowdown in momentum if the government proceeds with a planned rationalisation of Goods and Services Tax (GST) slabs, according to a recent analysis by HSBC Investment Research.
The report suggests that a cut in GST for internal combustion engine (ICE) vehicles could narrow the cost gap with EVs, weakening the pricing incentive that has so far driven adoption. “EV players will face a disadvantage if taxes are reduced on ICE vehicles,” the research note cautioned.
Government considers GST reform
The Centre has been working on restructuring the GST framework by scrapping two existing slabs. Bihar Deputy Chief Minister Samrat Choudhary recently confirmed that the Group of Ministers (GoM) has backed the proposal to eliminate the 12 per cent and 28 per cent brackets. If implemented, the reform could bring significant changes to the taxation of automobiles across categories.
( Small cars in India may get cheaper by 8% with GST reform, hints study)
While such a move may encourage demand for petrol and diesel vehicles and create short-term employment gains, HSBC warned that it would also reduce government revenues. The trade-off, it said, could weigh heavily on the fiscal side.
Three scenarios for the auto sector
In the first scenario outlined by HSBC, GST on small cars could fall from the current 28 per cent to 18 per cent. Larger cars, meanwhile, may move to a new 40 per cent rate with the removal of the existing cess. The research estimates that such a shift would translate into price cuts of nearly 8 per cent for small cars, while bigger models could become cheaper by 3 to 5 per cent. This would also help indigenous two-wheeler manufacturers who will stand to benefit significantly. The government would have to forgo a loss of revenue of around USD 4-5 billion.
The second scenario assumes a GST reduction in all categories of vehicles from 28 percent to 18 percent, with the cess remaining intact. This would lower ex-factory cost prices by 6 to 8 percent and bring vehicles closer to a broader range of consumers. However, the cost to the exchequer could potentially be even worse, with the loss of revenue estimated at USD 5-6 billion. The larger issue, from an HSBC perspective, is that this shift would also undermine the cost benefit that electric vehicles have now, which could retard their acceptance throughout the nation.
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The third and most unlikely option is a flat reduction in GST coupled with the abolition of the cess. This would be the most simplifying solution and introduce more transparency, HSBC cautions, but it may also be the most expensive for the exchequer. The government’s GST revenues from the auto industry would lose almost half under this scenario, making it a costly and politically and financially challenging move.
Implications for EV growth
India’s EV sector has been growing thanks to tax benefits, subsidies, and policy impetus. But a GST-induced price correction in ICE vehicles may dent the value equation for first-time buyers contemplating a transition to EVs. As affordability forms a vital component of the Indian scenario, the report says that tax policy choices will determine the next growth phase of the sector.