GST Effect: Here Is Why The Government Has Increased Tax Rates For Hybrids Under GST

The GST scheme has been criticised for imposing high taxes on Hybrids. Are the critics right?

oi-Stephen

By Stephen

Updated: Tuesday, August 8, 2017, 17:46 [IST]

India has just witnessed the opening of a new chapter in the economy with a new taxation scheme coming into place. The Goods and Service Tax (GST) system of taxation, an economic reform of sorts, has been rolled out from starting today, 1st July 2017. The new tax rates will do away with Excise duties and VAT and replace it with one single tax slab and an additional cess.

Brief on tax slabs:
The GST system basically has four taxation rates for everything that is taxable in the country - 5, 12, 18 and 28 percent. Cars, as a whole, will be taxed under the highest tax slab of 28 percent, but when divided into categories based on length, engine capacity and powertrain type, will attract a cess over and above the 28% rate.

Cars measuring lesser than 4-metres see a decrease in taxation rates between 1.7 percent and 2.5 percent. Cars longer than 4-metres see a decrease in taxation between 8.6 and 12 percent. Electric cars see a decrease of 7.5 percent. So everything looks good for the automotive sector and car buyers right? Wrong!

There is one segment of cars which would be affected pretty badly. That is the Hybrid segment - the only segment which would see a price increase post implementation of GST. Does India not want to shift to greener mobility?

Global shift towards green mobility:
Car manufacturers, environmental agencies and most governments around the world have realised that green mobility is the future, and is encouraging the use of hybrids and electric cars in every possible manner.

In the American market, buyers of plug-in hybrids benefit from a tax credit ranging between $2,500 and $7,500 depending on the size of the battery in the car, and a few states in the U.S provide additional benefits to electric car owners. In the U.K, the government provides a grant of up to 5,000 GBP on electric cars and plug-in hybrids, alongside other benefits like exemption from congestion charges, etc.

Why then is India discouraging hybrids? Or is it?
India on the other hand, judging by the taxes levied by GST on hybrid cars, seems to be discouraging car buyers from purchasing these green cars.

The BMW i8 is the Hybrid which would suffer the most, as the new 43 percent tax rate would see its price increased by nearly Rs 45 lakh. The Volvo XC 90 Hybrid would cost nearly Rs 17 lakh more than it does now. The Honda Accord Hybrid, Toyota Camry Hybrid and Toyota Prius would see an increase of Rs 8-10 lakh. Diesel variants of the Maruti Suzuki Ertiga and Ciaz equipped with SHVS tech will see a price increase of up to Rs 1.5 lakh.

There are very few hybrids on sale in India right now, and all of them already sell in dismal numbers. Honda sold only one unit of the Accord in April and none in May.

Toyota sold only 113 units of the Camry in April and 119 in May, and it is safe to assume that the Hybrid variants of the Camry would have clocked just single digit sales. With the high tax rates being levied on these Hybrids now, sales can only be expected to go down.

If the high GST rates for hybrids leave you confused and wondering why the Indian government is not doing enough to promote green cars, let me remind you of 'FAME'.

Brief on FAME:
According to the Press Press Information Bureau, 'FAME India Scheme [Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India] was implemented with effect from 1st April 2015, with the objective to support hybrid/electric vehicles' market development and Manufacturing eco-system.

The scheme has 4 focus areas, i.e. Technology development, Demand Creation, Pilot Projects and Charging Infrastructure. Phase-I of the scheme was implemented over a period of 2 years starting, 1st April 2015. The scheme was extended in March this year.

So the Indian government too had supported the sale of green cars for a while. But why are they stopping it now?

India's direct move towards electric cars:
Well, India isn't really cutting support for green cars, but only for hybrids. The government still is supporting electric cars and will continue to incentivise electric cars.

While most countries slowly climb the ladder of green mobility by promoting hybrids first, then plug-in hybrids, and finally all-electric cars, it seems like the Indian government is thinking futuristically, which is a very good thing indeed.

The GST scheme imposes 7.5 percent lesser taxes on electric cars, making it very clear that the government is promoting electric cars. This move by the government deserves applause, as it takes India to the all-electric car party earlier than expected.

Countries planning to ban fossil fuel-powered cars:
There are quite a few countries planning to completely switch to electric cars. Netherlands and Norway, both plan to completely phase out cars using petrol/diesel/CNG/LPG engines by 2025. Norway started its journey of promoting electric cars back in 1990, and they plan to go completely electric by 2025. It took this European country 35 years to do this.

Norway is a country with a population of 5.19 million (51 lakhs), whereas India has a population of 1.3 billion (130 crores). If India wanted to do what Norway did, it would take a pretty long time. Now, we all know that the future of automobiles lies in electric cars, so India would need to make a start if it wanted to get there some day.

Indian Government's Plans:
The Indian government had earlier this year revealed plans of having only electric cars on sale by 2030. While this is indeed a good plan for the environment and the electric car manufacturing segment, on the whole, it definitely is over-ambitious when one considers our market size and requirement.

The Indian government is going the extra mile to promote electric cars. In 2016, Indian Prime Minister Narendra Modi met Tesla CEO, Elon Musk at the company's Gigafactory and later, Indian Union Transport Minister Nitin Gadkari visited the same facility and met top officials of the company.

Mr. Gadkari even invited Tesla to set up a manufacturing plant in India and showed promise in providing land for the plant near any of the major ports of the country which would help Tesla with exports. He also hinted at the possibility of a Joint venture with an Indian manufacturer.

Tesla officials said it would be considered at the right time in the future and seems like they are indeed taking it seriously. Tesla has been in negotiations with the Indian government to relax import duties on their cars until a Tesla Gigafactory can be built in India.

Is the reduction of taxes on electric cars enough?
The reduction of taxes on electric cars and increase in taxes on hybrid cars, therefore, seems to be part of the government's plan to electrify the automotive industry. Industry analysts and green mobility experts though feel it just isn't enough.

After the GST percentages came out last month, a few industry experts and analysts spoke up saying that GST was the perfect opportunity to promote electric vehicles. While the government has done that by reducing tax rates, the experts feel that the government should have imposed zero taxes on electric cars until the market has gained significant momentum.

Do any other countries have zero taxes on electric cars?
The Norwegian government had introduced such incentives right from the time they began their campaign for electric cars. Back in 1990, they had exempted electric cars from purchase/import taxes, and in 2001 they further incentivised the purchase of an electric car by exempting it from the 25 percent value added tax (VAT) on purchase.

DriveSpark Thinks!
While the 43 percent GST on hybrids might kill the breed in India, it just might be an opportunity for manufacturers to step up the game and develop electric cars. There were reports of BMW seeking more clarity from the Indian government regarding GST on hybrids before considering their launch in India.

However, it might make more sense for BMW and other manufacturers now, to skip hybrids and bring in pure-electrics, like the BMW 3-series electric which is to be unveiled in September at Frankfurt, and of course the upcoming Tesla Model 3.

This move by the Indian government will surely bring in an influx of electric cars, in the near future. Until then though, it is the Mahindra e2o Plus, e-Verito and e-Supro 3, which would keep the electric car market going in India.