Electric vehicle tax advantages set to shrink as government pushes reform agenda
19 Aug 2025 | 5527 Views | By Angitha Suresh
A potential reduction in GST rates for India's automotive sector could deliver significant volume growth of 15-18% for major automakers, according to a new research report from BNP Paribas.
However, the investment bank warns that uncertainty around the timing of these reforms could disrupt crucial festival season sales in ...
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A potential reduction in GST rates for India's automotive sector could deliver significant volume growth of 15-18% for major automakers, according to a new research report from BNP Paribas.
However, the investment bank warns that uncertainty around the timing of these reforms could disrupt crucial festival season sales in the coming weeks, potentially affecting millions of consumers planning vehicle purchases.
The comprehensive report, released Monday, suggests that if sub-4 meter passenger vehicles and entry-level two-wheelers move from the current 28% GST slab to 18%, the Indian automotive industry could witness a transformation similar to the boom experienced in 2006.
Companies like Maruti Suzuki could see volume growth tailwinds of 15.5%, while Hero MotoCorp could experience an 18.3% boost in sales, according to the analysis.
"Based on our price elasticity analysis, we calculate the potential additional volume growth tailwind across OEMs from a change in GST rate," said Kumar Rakesh, automotive analyst at BNP Paribas Securities India.
The analysis, which examined around 100 motorcycle and scooter models, found that the two-wheeler industry demonstrates a price elasticity of approximately 1.6x, with entry-segment vehicles showing even higher sensitivity to price changes.
Learning from History: The 2006 Precedent
The BNP Paribas analysis draws crucial parallels to February 2006, when the government reduced central excise duty from 24% to 16% on petrol cars with length not exceeding 4 meters and engine capacity not exceeding 1200cc, and diesel cars with similar dimensions but engine capacity up to 1500cc.
This marked the first time the government created a separate classification for taxation based on vehicle dimensions to promote entry-segment cars in India. The impact was dramatic.
The mini and compact segment's year-on-year growth jumped from 7.1% between February 2005 to January 2006 to an impressive 23.4% between February 2006 to January 2007. The segment demonstrated price elasticity of approximately 2.0x during this period, with growth remaining above long-term averages even in the following year despite a tougher base.
Significantly, the research notes that this buoyancy in entry-level cars didn't come at the expense of higher segment vehicles. Instead, it expanded the overall market by bringing in new customers who were previously priced out. "The customers didn't necessarily trade down, rather the industry saw new customers due to lowering of prices," the report emphasized.
Festival Season at Risk: Immediate Concerns
Despite the positive long-term outlook, BNP Paribas cautioned that the lack of clarity on GST implementation timing could lead to immediate and significant disruptions.
With major regional festivals including Maharashtra's Ganesh Chaturthi in late August and Kerala's Onam spanning late August through early September, consumers may postpone vehicle purchases while awaiting the new tax structure.
The timing is particularly critical as these regional festivals serve as precursors to the main festival season beginning September 22, when the bulk of annual auto purchases traditionally occur in India. The report warns that this uncertainty could create a cascading effect on the entire supply chain.
"We fear the uncertainty could create inventory issues in the near future as many OEMs have started to build inventory ahead of the festival season," the report noted.
Automakers typically begin production ramp-ups months in advance to meet festival demand, and any disruption to buying patterns could leave dealers with excess inventory, potentially triggering production adjustments and affecting thousands of workers across manufacturing facilities.
The government sent its GST reform proposal to the group of ministers on Independence Day, August 15, with the next GST council meeting expected in September 2025. BNP Paribas estimates the proposal will likely secure the required 75% of weighted votes, with the ruling alliance controlling more than 78% of council representation through 21 of the 31 council members representing states and union territories.
Electric Vehicle Advantage Under Unprecedented Pressure
In a development that could fundamentally reshape India's electric vehicle landscape and its ambitious carbon reduction goals, the proposed GST restructuring would significantly reduce the tax arbitrage that has been a primary driver of EV adoption across the country.
Currently, EVs enjoy a substantial advantage with a 5% GST rate compared to 28-50% for internal combustion engine vehicles, making them increasingly attractive despite higher upfront costs.
Under the proposed changes, the tax advantage for electric two-wheelers would shrink dramatically from 23% to just 13%, while electric passenger vehicles in the sub-4 meter segment would see their advantage reduced from 24% to 14%.
This compression of the tax differential comes at a crucial juncture when India is pushing for greater EV adoption to meet its climate commitments and reduce urban air pollution.
"One of the drivers of EV demand has been the large tax arbitrage between ICE and EV vehicles. GST rate reduction could reduce tax arbitrage, making the case for EVs less favorable," the report stated.
This shift could potentially slow India's transition to electric mobility, affecting not just vehicle manufacturers but also the emerging ecosystem of charging infrastructure providers, battery manufacturers, and technology companies that have invested heavily in the EV sector.
The analysis also highlights that while EVs currently benefit from a 5% GST rate, manufacturers face an inverted duty structure where input tax rates range from 5-28%, creating working capital challenges.
The government has indicated it's working on correcting these inverted duty structures by aligning input and output tax rates, which could provide some relief to EV manufacturers even as their tax advantage over conventional vehicles diminishes.
Broader Reform Agenda
Media reports suggest the government's proposal extends beyond simple rate adjustments, encompassing a comprehensive restructuring of the GST system. The plan reportedly aims to consolidate the current multiple slabs into just two primary rates of 5% and 18%, plus 40% for certain sin goods. The compensation cess, originally scheduled to end in March 2026, may be terminated earlier or potentially subsumed into the new GST structure.
For the commercial vehicle segment, BNP Paribas notes that the impact would be limited, as most buyers in this category are businesses that claim input tax credits, making GST essentially a pass-through cost.
However, some light commercial vehicle and intermediate commercial vehicle customers who aren't large enough to file GST returns could benefit from any tax reduction.
As the automotive industry awaits clarity on these sweeping reforms, the coming weeks will prove crucial for a sector that contributes approximately 7% to India's GDP and employs over 35 million people directly and indirectly across the value chain.