Hybrid carmakers seek tax incentives as auto industry lobbies for clean mobility benefits

"Hybrid makers are seeking tax-related benefits because the tax for clean mobility is lower. Electric vehicles have a goods and services tax of 5%, but hybrids are taxed at par with fossil-fuel vehicles," one person said.

Hybrid carmakers had approached the heavy industries ministry over the definition of clean mobility and highlighted the tax differential between fossil-fuel and hybrid vehicles, the second person said. The government will incentivise all forms of clean mobility, Mint reported on 6 June, citing heavy industries minister HD Kumaraswamy.

A draft of the Delhi EV Policy 2.0 proposing parity of incentives between zero-emission electric vehicles and hybrid vehicles propped up a debate in April, leading to consultations between the heavy industries ministry and automakers.

Also Read | Hybrids vs EVs: New advisory for Delhi fleet operators adds fresh fuel to fire

The issue of tax incentives for hybrids has been a longstanding concern, the second person said. The matter involves aspects such as whether India can reduce the reliance on Chinese supply chains for EVs and whether state governments are willing to give up tax revenue to support hybrids.

There is growing clamour to de-risk electric vehicle portfolios from Chinese supply chains, as highlighted by an industry veteran in a letter to Kumaraswamy. A clean mobility strategy that incentivises only electric vehicles is susceptible to trade-related risks, Rajan Wadhera, former president of the Society of Indian Automobile Manufacturers, said in the letter.

"If we pursue only one technology for our carbon-reduction goals, we would be exposing ourselves to serious risk by becoming totally dependent on China," Wadhera said in the letter dated 4 June. However, he added that India can harness alternative technologies such as biofuels, strong hybrids, compressed natural gas, liquified natural gas and hydrogen.

SHEV, PHEV

Most recently, the disruption in rare earth magnet supply chains, which is controlled by China, has exposed the risks of being import-dependent for key industrial components. Magnet supply constraints could impact electric vehicle production.

Maruti Suzuki, India’s largest car manufacturer, Toyota and Honda Cars India are among the top makers of hybrids in the country. Maruti Suzuki and Toyota have a strategic partnership under which they share hybrid technology for their vehicles.

Queries sent to Toyota Kirloskar Motor, Honda Cars India, and the heavy industries ministry remained unanswered till publishing time.

Also Read | India ‘increasingly important’ as Suzuki's global exports hub for EVs, hybrids, small cars: Toshihiro Suzuki

Hybrid vehicles, which use petrol/diesel engines with an electric motor and battery to improve fuel efficiency and reduce emissions, are of two types – strong hybrid electric vehicles (SHEVs) and plug-in hybrid electric vehicles (PHEVs).

SHEVs run on a combination of fossil fuels and a battery-powered motor. On the other hand, PHEVs have a charging port for a battery that generates electricity for the car, along with an internal combustion engine that runs on fossil fuels.

According to Rahul Bharti, senior executive officer for corporate affairs at Maruti Suzuki, the company is pursuing multiple technologies for decarbonisation and is trying to make SHEVs viable in India. 

“However, customers have to pay much more GST in ₹per car terms than corresponding petrol/diesel car," Bharti said. 

“This is because (although) GST rate on SHEVs is almost similar, only marginally lower than petrol/diesel cars, but their ex-factory cost is higher owing to a battery and motor," he added. "If we get some policy support and volume of hybrids increase, we could go beyond Li-ion cell localization to electrode-level localization and secure our supply chain in India."

Compensation cess

Experts said the debate over taxation of hybrid vehicles may boil down to the compensation cess component, which is levied on fossil fuel and hybrid vehicles but not on EVs. Electric vehicles attract a GST of 5%, while hybrids and fossil-fuel vehicles are levied a 28% tax.

Also Read | How hybrids are reshaping India's green auto market

"At present, consumers are subject to a 43% tax on vehicles powered by fossil fuels or hybrids. This consists of a 28% GST and a 15% compensation cess, the latter of which supports state revenues. For certain larger luxury cars, this may be even higher – up to 48%. In contrast, electric vehicles benefit from significantly lower taxation, with only a 5% GST," said Khushboo Jain, principal associate at Roedl & Partner India, a tax consultancy.

"States may have to consider if they want to lower their compensation cess, in case the issue is discussed within the GST Council," Jain addeda