Union Budget 2023: An accelerator for electric vehicles

Industry Outlook Team | Tuesday, 24 January 2023

A number of beneficial policy changes are anticipated in 2023 as a result of India's G-20 chairmanship. The presidential theme includes both the broad spirit of Vasudhaiva Kutumbakam and developmental measures centred on a cleaner, greener, and bluer future.

India has maintained a favourable stance on sustainable development and the country's capacity building for the renewable industry for the past several years, which has resulted in positive feelings in the sector. Although the green economy is still in its infancy, India has a lot to gain from it in terms of addressing the trilemma of energy affordability, security, and sustainability. Additionally, it is essential for modernising the economy, ensuring a Just Transition on climate change, and creating jobs. With approximately Rs. 20,000 crores set aside for the Green Hydrogen Mission, the year has already gotten off to a great start. More is probably going to flow in other areas, particularly clean transportation and electric automobiles (EV).

An effective domestic EV industry must be prioritised by policy, which calls for more concentration. India has been a significant global player in the Internal Combustion Engine (ICE) business during the past three decades. India must fast shift to electric vehicles (EVs) from internal combustion engines (ICE) in order to build a strong domestic and export market. Unfortunately, the EV ecosystem, comprising the components, the supply chain, and the operational infrastructure, differs greatly from the ICE ecosystem in many ways. Thus, for an effective transition where India carves out its own niche in the global EV ecosystem, active state backing becomes crucial.

With the Central Government and State Governments like Delhi, Maharashtra, Tamil Nadu, and Kerala offering tax benefits, waivers of road tax, and registration cost for electric car owners, the initial push for encouraging sales of electric vehicles has already been launched. The fact that sales of electric vehicles have risen year over year suggests that EV owners have appreciated these measures. It is anticipated that the Indian EV market will sell 6 lakh units in FY23 alone, which is a highly encouraging development.

With budgeted outlays of INR 10,000 crore and INR 25,938 crore, respectively, the government has already started programmes for electric vehicle producers, such as the Faster Adoption of Manufacturing of Electric Vehicles Scheme-II (FAME-II) and Production Linked Incentive Scheme (PLI). Automobile producers have also pledged to invest a total of INR 74,850 crore in these efforts,

surpassing the government's objective estimate of INR 42,500 crore spread over a five-year period beginning in FY23. Such efforts and the ensuing industry response provide the much-needed impetus for Make in India, the Atma Nirbhar Bharat Abhiyan, and the 5 USD trillion economy. While Government of India is taking positive steps towards achieving its aim of having electric vehicle sales comprising of 30% of private cars, 70% of commercial vehicles and 80% of two – three wheelers, the upcoming Union Budget provides a good opportunity for the Government to further boost this space and provide impetus for growth. Some of the measures that can be considered by the Government are mentioned below:

·While the steps have been taken for electric vehicle manufacturers and buyers, support should also be provided for improving charging infrastructure. Certain States like Andhra Pradesh, Assam, Gujarat, Karnataka, Kerala have provided subsidies / incentives for laying down charging infrastructure, however, the same requires support from Central Government for pan-India coverage. Accordingly, the Government should consider increasing the budgetary allocation under the FAME - II policy and include charging infrastructure within its ambit.

·Incentivization of battery swapping business models under FAME - II framework should also go a long way in making the usage of electric vehicle viable for public.

·Currently, FAME - II policy is slated to expire on 31 March 2024. The Government should consider extending this time limit, given that this sector is at a nascent stage.

·Rationalizing GST rates for electric vehicles and its essential components ~ currently, GST outlay on electric vehicles stands at 5% whereas majority of its components are subjected to a higher levy of 28% and 18%. The Government should bring these components under the same umbrella of 5%.

·There is a large ICE stock which needs to be transitioned towards clean mobility solutions. The State Governments have also empaneled vendors for converting these ICE into electric vehicles. Conversion kits are subjected to a higher GST rate of 18%. The Government should consider bringing in parity for such conversion kits to promote conversion of ICE into electric vehicles.

·Battery prices have increased to the extent of 25% in the past one year owing to increase in input costs. The Government should consider providing incentives, such as, Viability Gap Funding for Energy Storage Systems projects for a certain transitional period till the costs come down to a reasonable level and subsequently the same can be phased out.

·This sector is driven by extensive research and development, hence, an additional tax deduction should be considered for companies spending on research and development activities relating to electric vehicles and their components.

·Concessional income tax rate of 15% is available for new domestic manufacturing companies which commences production on or before 31 March 2024. This timeline of commencing production before 31 March 2024 appears to be short given the extensive research and infrastructure required to be set up by electric vehicle manufacturers. The Government should consider extending this benefit to a later date as well.

The above mentioned measures should go a long way in creating a more harmonized structure in the industry and for taking the initiative to the next stage of development and evolution. This is a critical year which not only marks India’s G-20 presidency but also an inflection point for its clean energy transition and economic transformation. These practical steps should make the transition and transformation real and create a huge positive vibe that will go on to serve India’s global leadership ambitions.