Mint Explainer: Why auto industry is divided on tax breaks for hybrid vehicles

The strong hybrid version of Maruti Suzuki Grand Vitara costs around 15-20% more than its mild hybrid counterpart as well as similar cars from other brands with conventional powertrains.
The strong hybrid version of Maruti Suzuki Grand Vitara costs around 15-20% more than its mild hybrid counterpart as well as similar cars from other brands with conventional powertrains.

Summary

  • While some companies argue that tax cuts on hybrid vehicles could see higher adoption, those against contend that hybrids are an intermediate technology in the transition to a fully electric future and should not get concessionary tax rates

Top automakers are divided on the Indian government's tax policy on hybrid cars. While Maruti Suzuki and Toyota advocate for lower taxes for hybrids to encourage their adoption, Tata Motors, Mahindra, and Hyundai argue against any preferential tax treatment for these vehicles.

These companies account for over 85% of the Indian car market, effectively making this an industry-wide discord. Both the camps have lobbied with various government departments and ministries, including the Prime Minister’s Office.

Hybrid cars integrate power from a conventional internal combustion engine with an electric motor, enhancing fuel efficiency of the vehicle, and reducing emissions and fuel consumption. However, these vehicles cost more than comparable combustion engine vehicles as they have several additional parts, including motor, battery, and associated electronics.

Proponents of hybrids argue that tax reductions would narrow the price gap with conventional cars, thereby increasing consumer adoption. They believe this shift would assist the government in achieving lower emission goals and decrease the country’s oil import bill. Mint explains what the issue is all about. 

Prevalent tax rates on cars in India

In India, hybrid cars are taxed at the highest GST rate of 28%. This is the same as a conventional combustion engine vehicle. Cars also attract an additional cess of 1-22% on top of GST, depending on their size, fuel type and engine capacity. Here, hybrid cars attract a lower cess by 1-7 percentage points depending on the car type.

The following table contains the effective tax rate for different type of cars. It ranges from 29% to 50%. Electric vehicles attract a preferential GST rate of 5% with no additional cess.

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The demand

Companies are reportedly seeking a waiver of additional cess on hybrid vehicles, and proposing a uniform 28% GST rate. This would reduce the prices of bigger hybrid cars by 15%, making them price-competitive with traditional combustion engine vehicles.

For example, the strong hybrid version of Maruti Suzuki Grand Vitara costs around 15-20% more than its mild hybrid counterpart as well as similar cars from other brands with conventional powertrains. Removing additional cess on hybrids will level the pricing field, encouraging consumers to opt for the environmentally friendly hybrid option.

Arguments for reducing tax rate on hybrids

Pro-hybrid companies have argued that hybrid vehicles emit significantly lower emissions than combustion engine vehicles but continue to be taxed at nearly the same rate. In contrast, electric vehicles enjoy a preferential tax rate as well as subsidies under various schemes as they cut emissions and India’s crude import bill.  

These companies have further argued that even under best case scenario, electric cars will account for around 30% of new car sales by 2030, leaving a substantial portion of the market to combustion engines. In such a situation, tax cuts on hybrid vehicles could see higher adoption of hybrids in the non-electric car market, especially in the case of larger vehicles.

Using the Maruti Suzuki Grand Vitara as an example again, the strong hybrid version boasts a fuel efficiency that is over 33% better than its mild hybrid variant. It’s claimed fuel economy is as much as 50% better than comparable rivals with conventional powertrains.

Arguments against reducing the tax rate

Some companies argue that hybrids are an intermediate technology in the transition to a fully electric future. Thus, they say, these vehicles should not have any concessionary tax rates.

Domestic companies also contend that giving tax breaks to hybrid vehicles at this juncture would be a departure from the government’s long-term strategy of focussing sops on electrification, and thus would be unfair to the players who have invested in electric vehicle development, following the roadmap given by the government. 

These companies do not have any hybrid technology and if the market realities shift in favour of hybrid vehicles, they may lose out to multinational automakers who have hybrid technology in their global portfolio and can easily bring it to India.

Government’s stance

While the Indian government has long maintained that the path to a lower-emission future should be technology agnostic, it has officially kept mum on this issue.

However, in terms of taxation, only electric vehicles get preferential treatment. The government’s production-linked incentives (PLI) scheme for Advanced Automotive Technology Products–which has a budget to distribute almost 26,000 crore as incentives for promoting the manufacturing of automotive products in the country–also focuses on zero-emission vehicles, including battery electric and hydrogen fuel cell vehicles,  without direct incentives for hybrid vehicles.

 

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