The Union government unveiled a host of incentives for electric vehicles (EVs), including income tax rebates for buyers, lower customs duties on spare parts for such vehicles and tax breaks for local spare parts makers, as it seeks to transform the world’s third-largest oil importer into a global manufacturing hub for electric vehicles.

The announcements by finance minister Nirmala Sitharaman in the Union budget on Friday come at time when policy think-tank NITI Aayog is working with other ministries on a policy proposal to ban internal combustion engine-driven two- and three-wheelers by 2025 and 2023, respectively. Increasing EV sales has been a priority of the Modi government, which began on 1 April 2019 with the second phase of the Faster Adoption and Manufacturing of Electric and Hybrid vehicles (FAME) scheme with an outlay of 10,000 crore to incentivize sales of such vehicles.

In her maiden budget, Sitharaman announced income tax rebates of up to 1.5 lakh to customers on interest paid on loans to buy electric vehicles with the total exemption benefit of 2.5 lakh over the entire loan period. India will also set up mega manufacturing capacities for semi-conductors and lithium-ion batteries through competitive bidding.

“Considering our large consumer base, we aim to leapfrog and envision India as a global hub of manufacturing of electric vehicles. In order to boost economic growth and Make in India, the government will launch a scheme to invite global companies through a transparent competitive bidding to set up mega-manufacturing plants in sunrise and advanced technology areas. Government has already moved GST council to lower the GST rate on electric vehicles from 12% to 5%," said Sitharaman.

The minister also announced exemption in customs duty on lithium–ion cells to 0%, which will help reduce the cost of lithium-ion batteries in India since they are not yet manufactured locally. Manufacturers of components such as solar electric charging infrastructure and lithium storage batteries and other components will be offered investment linked income tax exemptions under Section 35 AD of the Income Tax Act, and other indirect tax benefits.

The push for green energy comes in the backdrop of the Organization of the Petroleum Exporting Countries (Opec)-plus arrangement extending its production cut pact. This will have a wide-ranging impact on energy markets, given Opec comprises around 40% of global output. For India, the ramifications will be particularly significant as Opec makes up about 83% of the country’s total crude oil imports.

Increased use of electric vehicles will not only cut the hefty oil import bill but also help to curb rampant pollution in its major cities.

“We cant afford to delay the steps needed to take keeping environment and pollution in mind. All our current and future generation will be cursing us if we didn’t put our commitments very clearly up and forward like the way we committed on solar energy with the International Solar Alliance and we are investing in solar energy. This is very consistent with that," Sitharaman said in an interview with Doordarshan.

The message from the Union government to traditional manufacturers could be more profound as the incentives for electric vehicles was followed by the introduction of special additional excise duty and road and infrastructure cess each by one rupee a litre on petrol and diesel. This might impact consumer sentiment when auto sales are at a multi-year low.

Recently, traditional manufacturers—Hero MotoCorp Ltd, Bajaj Auto Ltd, Honda Motorcycle and Scooter India Pvt. Ltd and TVS Motor Co.— have jointly objected to the government’s plan to have less than 150cc electric two-wheelers by 2025. With the steps unveiled in the budget, India has joined G-20 economies like China, France and the UK where regulations have been devised to push automakers towards electric and other electrified power trains.

Investors beat automobile stocks after the budget proposals for electric vehicles were made. Mahindra & Mahindra Ltd, the country’s largest electric vehicle maker and also the second-largest maker of sport-utility vehicles, closed 4.4% lower while Maruti Suzuki India Ltd and Tata Motors Ltd fell 2.7% and 3%, respectively. Among the two and three-wheeler makers, Hero MotoCorp Ltd, the largest two-wheeler maker, fell 3.5% while Bajaj Auto Ltd and TVS Motor declined 2.1% and 1.9%, respectively. Electric vehicle startups welcomed the incentives for the sector.

Tarun Mehta, founder and chief executive, Ather Energy, an electric scooter manufacturing startup, said the additional income tax benefit for purchasing EVs is a major boost for end-consumers. “It addresses the concern of the upfront cost of purchasing electric vehicles. This is the best example of a consumer-driven change and is also how Ather envisions the EV sector to achieve scale and growth. It now becomes imperative that OEMs chalk out plans that allow the industry to scale up and meet the demand for compelling products," Mehta said.

Chetan Maini, founder and CEO, Sun Mobility, said the decision to cut tax on EVs to 5% is a reassuring move by the government and furthers the country’s commitment to transition to an EV future. However, it would be more beneficial for the end-user, if the government also focuses on reducing GST on charging or battery swapping services from 18% to 5%.

Shailesh Chandra, president, electric mobility business and corporate strategy at Tata Motors, said the incentives announced by the finance minister reinforces a strong commitment by the government to steer electrification on a faster trajectory.

“It will help in further narrowing down the cost of ownership gap against ICE vehicles. Additionally, private buyers, who were earlier not considered for a subsidy through FAME 2, will now have a reason to seriously consider an EV with the tax exemption of up to 1.5 lakh," Chandra said.

Utpal Bhaskar and Shreya Nandi contributed to this story.

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