Elon Musk Effect: Government Considers Sharp Import Tax Cut On EVs in India

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Last month Elon Musk revealed one of the real causes behind the delay in launch of Tesla Cars in India – higher import tax. According to Reuters, the government of India is, now, exploring options to cut down import duties on electric cars to as low as 40%. The development is reportedly taken place days after Tesla started polarising the country’s auto industry in favor of import tax cuts for EVs.

According to officials, who spoke to Reuters on the condition of anonymity, the government is considering reducing the tax rate significantly for imported electric vehicles (EVs), which are price tagged with less than $40,000, including freight, cost, insurance, and car’s cost.

The import duty reduction is only being considered for EVs and not for other types of imported cars. Therefore, domestic automakers must not be concerned as they mainly produce affordable gasoline-powered vehicles.

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Import Tax Cut On EVs: Big Picture

  • The talks related to the launch of Tesla Cars in India started gaining momentum after Tesla registered its company in India early this year.
  • Import duty on Electric cars that are price tagged with less than $40,000 would be cut to 40% from 100%.
  • Electric cars with a price value above $40,000 would attract 60% import duty, down from 100%.
  • India is the fifth largest car market in the world, with an average of 3 million vehicles sold annually. However, the majority of cars sold are below $20,000. 
  • The sales of electric two-wheelers in India reached 156,000 in FY’20. On the other hand, the sales figure of electric cars in India is still negligible.
  • According to industry estimates, EVs only make up a small portion of total sales and luxury EVs are very rare.
  • In July, while having a discussion with the government officials, Tesla emphasized the fact that lowering import duties for EVs to 40% would make them cheaper and increase sales. 
  • Tesla’s argument, however, triggered a debate among automakers about whether such a move would jeopardize India’s efforts to increase domestic manufacturing.
  • Tesla’s cars fall under the high-end category of EVs, which is mainly imported to India and accounts for a smaller percentage. Audi, Jaguar Land Rover, Mercedes and Jaguar Land Rover are the importers of luxury EVs as well.
  • Tesla’s demands have found support from Mercedes as well as South Korean automaker Hyundai Motor, which has around an 18% share of India’s car market.
  • The proposed cuts, however, are opposed by Tata Motors, a manufacturer of affordable electric cars in India, and Softbank Group-backed Ola, which is all set to launch its first electric scooter on August 15.
  • The government is believed to support a cut if Tesla can provide some benefit to the country’s economy.
  • The government would ask Tesla to either manufacture locally or give a timeline for when it would be possible to.
  • Tesla CEO Elon Musk expressed his disappointment by tweeting about the high import duties. He also tweeted that a factory in India is “quite probable” if the company succeeds with vehicle imports.
  • The proposal is still at the discussion stage. India’s finance, commerce, and federal think tank Niti Aayog (presided over by Prime Minister Narendra Modi), and all stakeholders will be a part of the discussion to submit their views.

Food For Thought

India’s luxury car market is relatively small, and Covid has brought more damage to it. In FY’21, the sales of luxury cars in India were down to just 19,700 from 40,637 in the previous year. In a bid to increase sales many automakers, including Daimler’s Mercedes-Benz, which leads the luxury car market in India, have been lobbying for lower import duties on luxury cars for years but faced strong resistance mainly from domestic companies. 

Given that only one Tesla car model – Model 3 – is priced below $40,000, how helpful these proposed cuts on import duty would be helpful for buyers in India is a matter of discussion still. India is widely popular as a price-sensitive market, and it clearly reflects from the sales share of cars that are priced below $20,000.

The government believes that Tesla could make electric cars more accessible in India, which is behind other major markets for EV sales.

According to a person, the government is looking at the best approach and wants to see offer some benefit to Tesla only if it pledges to manufacture some parts domestically.

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