Govt approves new EV policy to cut import tax on cars to 15%; Paves way for Tesla's India entry

Paving the way for the entry of more global automakers in the country, the centre today announced a much-anticipated electric vehicle policy that drastically reduces the import duty on electric cars to 15% from the current 70-100% for five years. Automakers can benefit from the reduced import tariff if they invest at least Rs 4,150 crore, or USD 500 million, to make in India within three years.

“Under this scheme, EV passenger cars (e-4W) can initially be imported with a minimum CIF (cost, insurance, and freight) value of USD 35,000, at a duty rate of 15 percent for a period of 5 years from the date of issuance of approval letter by MHI (Ministry of Heavy Industries),” according to a gazette notification issued today.

The new policy states that companies will have to set up manufacturing facilities in India with a minimum investment of Rs 4,150 crore and start commercial production within three years. There is also a clause on domestic value addition – the manufacturers will have to achieve a 25 percent domestic value addition within three years and further increase it to 50 percent by the fifth year.

There are also certain thresholds on the import of electric vehicles at the concessional tariff. The companies will be allowed to import a maximum of 40,000 electric vehicles, at a rate of 8,000 cars per year, at a 15 percent duty. “The duty foregone on the total number of electric vehicles allowed for import would be limited to the investment made or Rs 6,484 crore (equal to incentive under PLI scheme) whichever is lower,” the government said.

The government will invite applications from the companies within 120 days (or more) of notification of the scheme. The companies will have to back their investment commitment with a bank guarantee in lieu of the custom duty forgone. The bank guarantee will be invoked if the company fails to make the minimum investment and domestic value addition criteria. The companies are also not allowed to dilute their shareholding during the tenure of the scheme.

“This (new policy) will provide Indian consumers with access to the latest technology, boost the Make in India initiative, strengthen the EV ecosystem by promoting healthy competition among EV players leading to high volume of production, economies of scale, lower cost of production, reduce imports of crude oil, lower trade deficit, reduce air pollution, particularly in cities, and will have a positive impact on health and environment,” the government said.

Higher import tax has been one of the major reasons that restricted some global car makers such as Tesla from starting operations in India. Tesla was in talks with the government to enter India, but its plan was reportedly halted due to the high import duty structure. The government had also asked the automaker to commit to domestic manufacturing before reducing tariffs.

India is currently the world’s third-largest passenger vehicle market in the world. With electric vehicle adoption picking up, the government expects the country to be the largest electric vehicle market in the world by the end of this decade. Prime Minister Narendra Modi recently said that India’s mobility sector is at the onset of a golden period with the economy expanding fast on its journey to a developed country status by 2047.

The new policy aligns with the government’s ambition to make India a global mobility hub as it would open the market for more global manufacturers and suppliers. “This will open up the Indian automotive market to new carmakers, suppliers and technologies. The overall EV ecosystem is expected to receive a significant boost with new entrants. One or two domestic carmakers cannot take bear the burden of developing a complete electric vehicle ecosystem,” said Gaurav Vangaal, associate director at S&P Global Mobility for Light Vehicle Production Forecasting.

Automotive Component Manufacturers Association President Shradha Suri Marwah believes the policy not only aims to attract global electric vehicle majors to invest in India but also emphasizes significant domestic value-addition criteria, ensuring the creation of a robust supply-side ecosystem.

“Countries that have been front-runners in electric vehicle adoption have also developed a local vendor ecosystem. This policy is a step in the right direction and would aid in increasing EV components localisation in India, which is currently at 30-40 percent,” ICRA’s Senior Vice President and Group Head – Corporate Ratings Shamsher Dewan said.

Lower import duty on electric cars could increase the competition for domestic automakers who have been looking at the mid-premium space for higher margins in the electric vehicle portfolio. Tata Motors and Mahindra & Mahindra had reportedly raised concerns with the government last year on plans for lower import duty. The automakers reportedly opposed the government’s plans, citing that its investors made decisions under the assumption that the tax regime favoring locals would remain unchanged.

“Marginal sentiment negative for domestic OEMs as the entry of global companies would increase competitive intensity in the premium segment. Sentiment positive for domestic ancillaries. Entry of global OEMs with 50% localization, would open business opportunities for ancillaries in EV parts/ structural parts,” said Nuvama Institutional Equities’ Director Raghunandhan NL.

However, Mahindra & Mahindra today said the new policy will accelerate the electric vehicle ecosystem in the country. "The recently announced EV policy for new entrants reinforces the Make in India momentum, with requirements of bank guarantees, minimum investment commitment and local value addition,” the company’s spokesperson said. Mahindra is on track to launch its Born Electric range of SUVs in January 2025 and the spokesperson said: “Our products will speak for themselves.”

Senior government officials said the new policy is not tailor-made for any particular foreign automaker, it gives equal opportunity for the domestic players as well to claim benefits and introduce new products.

With inputs from Amit Mohile