The Indian electric vehicle (EV) industry is hoping for the government to rationalize the indirect tax structure on EV components and extend the rollout of incentives under the Faster Adoption and Manufacturing of Electric Vehicles (FAME) program.

Further, the industry has also appealed to the government that the EV sector is classified under priority lending guidelines allowing scheduled banks to lend more liberally to the industry, as observed in the renewables sector.

The industry has just emerged from a record-breaking year of selling more than a million electric vehicles. Stakeholders believe that sales in 2023 could easily surpass 2022 levels.

Restructuring GST rates

Goods and Services Tax (GST) related rules are not announced in the budget as the GST Council is the statutory body for outlining the laws. But the industry looks forward to the government declaring its intent to rationalize some of the skewed taxation structures adversely impacting the EV industry.

“In the previous budgets, we have seen a GST reduction on EV buying and rentals from 18% to 5% -this time, the government must replicate the same for services. The electric-vehicles-as-a-service (EVaaS) segment is eagerly expecting GST reduction to 5% on EV-led services such as last-mile delivery, battery swapping, etc.,” said Akash Gupta, Co-founder & CEO of Zypp Electric.

For instance, the government currently levies a 5% GST on fixed batteries, while swappable batteries attract an 18% rate. The high rates are detrimental to the large-scale adoption of battery-swapping technology, which is critical to accelerating EV adoption.

According to industry sources, currently, batteries constitute ~30% of the cost of an EV. If the government reduces the GST on swappable batteries, it could encourage the expansion of the Battery-as-a-service (BaaS) model.

This model allows consumers to lease batteries separately from the vehicle, eliminating the need to pay for the battery upfront when purchasing any vehicle.

From a customer perspective, BaaS is an asset-light, low-cost, and fast-on-its-feet model, as it allows for instant battery swapping, unlike fixed charging stations which are time-consuming and cost-intensive.

Due to the BaaS model, upfront costs for EVs may decrease significantly, leading to wider adoption. While corporate customers can take the input tax credit on the GST paid during this transaction, retail customers absorb the tax as a cost.

Avinash Sharma, CEO and Co-Founder of ElectricPe, said there is a discrepancy with GST being applied at 18% if charging is considered a service and 5% if it is viewed as a sale of goods.

Another problem is that there is only a 5% GST on EV sales but 28% for spare parts. Equalizing the tax rates will incentivize manufacturers to reduce their costs leading to increased consumer affordability.

Extending FAME II

The industry expects the government to extend the duration of the financial incentives program provided under FAME-II, set to expire on March 31, 2024. According to the FAME-II dashboard, the government has allotted ₹35.66 billion (~$438.04 million) in subsidies to 814,645 EVs.

M.S. Chugh, Founder & Chairman of Aponyx EV, said if the government extends the duration of the incentives, it will help increase the adoption of EVs, benefiting both manufacturers and consumers who would continue to receive subsidies for purchasing EVs.

Other stakeholders have argued that FAME II incentives should have a sunset clause based on converting vehicles running on conventional fuel to EVs.

Further, the Society of Manufacturers of Electric Vehicles (SMEV) said, “According to market trends, e-mobility, particularly in the electric two-wheeler segment, has the potential to continue growing once it reaches 20% of the total two-wheeler market. The subsidy can be tapered after that.”

Priority lending

Access to affordable finance will continue to play a critical role in the future of EVs. And the sector could achieve a breakthrough in affordability if it is included among the sectors that qualify for priority lending under the Reserve Bank of India guidelines.

Industry stakeholders have pointed out that public and private sector banks have generally been slow in financing EVs for business and commercial use which could be rectified in the upcoming budget.

Gaurav Rathore, Co-founder of EVeez, said, “It is imperative that financing of EVs be brought under the ambit of priority sector lending. The EV businesses encompass two sectors – renewable energy and MSMEs — which are already availing of priority sector lending benefits.”

Affordable and abundant capital will ensure that quality products are reaching the consumers and manufacturers aren’t incentivized to cut corners to keep vehicles affordable, Akshay Singhal, CEO & Founder of Log9 Materials, said.

Further, SMEV said that the government should extend the guarantee offered by NITI Aayog and the World Bank through SIDBI, even for commercial four and six-wheelers.

SMEV argued for interventions to cut the capital cost to pure EV manufacturers for setting up EV manufacturing facilities. Further, it said that the government should provide a 50% subsidy for charging infrastructure.

The EV market in India reached a milestone in 2022, with sales surpassing one million units, a year-over-year increase of over 300%. To continue this progress, the government must understand the industry’s needs and take calibrated steps necessary to maintain the positive growth curve.