India-UK FTA to cut import duty on ICE cars to 10% in 5 years

The India–UK Comprehensive Economic and Trade Agreement (CETA) will progressively slash the base rate of customs duty on internal combustion engine (ICE) passenger vehicles to as low as 10% over the next five years, according to a document from the Ministry of Commerce.

The trade agreement has introduced phased reductions in India's currently steep import tariffs, ranging from 66% to 110% based on engine capacity, for ICE passenger cars made in the UK. 

For petrol cars with engine capacities above 3000cc and diesel cars above 2500cc, the base rate of customs duty will drop from 110% to 10%. Similarly, for petrol cars up to 3000cc and diesel cars up to 2500cc, the duty will be reduced from 66% to 10% by the fifth year.

In the first year, the 110% duty on petrol cars with engines exceeding 3000cc and diesel vehicles exceeding 2500cc will be cut to 30%, limited to a quota of 10,000 cars. For mid-range vehicles – specifically petrol cars from 1500cc up to 3000cc and diesel cars up to 2500cc – the duty will be reduced from 66% to 50%, with a quota of 5,000 units. 

Similarly, for smaller cars (up to and including 1500cc), the duty will also drop from 66% to 50% for 5,000 units in the first year.

For petrol cars with more than 3000cc engines and diesel cars with 2500cc engines, the quota for reduced tariffs will gradually increase to 19,000 cars by the fifth year, before decreasing to 7,500 cars from the fifteenth year onwards.

Similarly, for the rest of the cars, the quota will gradually increase to 9,000 units by the fifth year, and reduce to 3,750 units from the fifteenth year. In the fifth year, a total of 37,000 ICE cars across all engine capacities can be imported under these special tariff arrangements.

Vehicle imports exceeding the specified quotas will still face higher tariffs. However, even these duties will be progressively reduced, reaching 50% for high-end categories by the tenth year.

This duty relief opens India's historically protected automobile market, allowing UK automakers to introduce more models at competitive prices, particularly within the premium and luxury segments. This move is expected to especially benefit high-end British carmakers like Jaguar Land Rover, Bentley, Aston Martin, and Rolls-Royce.

However, the FTA explicitly excluded battery, hybrid and hydrogen-powered passenger cars priced under £40,000 (approximately Rs 44 lakh) from any import duty cuts, a move aimed at shielding the domestic manufacturers. The basic customs duty on these cars will remain 70%.

For the initial six years of the FTA, no import duty concessions will be granted for any alternative fuel vehicles, regardless of their price, even those exceeding £40,000. However, from the sixth year onward, vehicles priced above £40,000 will begin to see gradual duty reductions, subject to specific import volume thresholds. Currently, vehicles in this price segment face a basic customs duty of 110%. 

While this duty concession opens doors for greater choice and increased competition, especially from UK-based carmakers, it also prompts existing global brands to rethink their localisation and investment strategies, including potential manufacturing footprints in the UK, said Saurabh Agarwal, Partner and Automotive Tax Leader, EY India. 

Raghunandhan NL, director at Nuvama Institutional Equities, said is duty cut on imports is unlikely to have any negative impact on Indian OEMs and ancillaries, in PVs and CVs, as the reduction in tariffs is over a period of time, and the quotas are small.

Finalized after 14 rounds of negotiations, the FTA eliminates steep tariffs on a wide range of goods and services, significantly deepening the economic engagement between India and the UK. The deal is projected to substantially boost annual bilateral trade by an impressive £25.5 billion.

“We welcome this free trade agreement between the UK and India, which over time will deliver reduced tariff access to the Indian car market for JLR's luxury vehicles," a Jaguar Land Rover spokesperson said. 

Carmakers including Jaguar Land Rover, Nissan, BMW Group, Toyota, Rolls-Royce, Aston Martin, Bentley, Lotus and McLaren have manufacturing operations in the UK.

Conversely, the UK is set to open its market to electric, hybrids and hydrogen-powered cars manufactured in India. From the sixth year of the trade agreement, the UK will eliminate import duties on these vehicles, offering a major boost for Indian EV manufacturers looking to export to the UK market.