Time to rethink Indian levies on motor vehicles

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How different cars are taxed in India?

GST is levied at 28%, the top slab, with an add-on cess of 1% on small cars(less than 4m length) and 17-22% extra on those longer than 4 meters. While the exhaust-free Electric Vehicles attract a GST rate of just 5%.

What is the rationale behind such a differential taxation system?

The majority of the cars attracting a higher rate of GST are ‘luxury’ cars.

A low tax rate makes it possible for EV-makers to reduce prices enough to compete with fossil-fuel-based cars. It will also hasten the process of transition to EVs.

What are the issues associated with this differential taxation system?

Excessive protection to EVs will not help in becoming globally competitive. ‘Made in India’ EVs need to be cost-competitive on their own by innovation and competition, then only will have a good chance at global success.

As low tax on smaller cars led to more demand for smaller cars, and therefore larger vehicles, that make up the bulk of foreign markets, are unable to find economies of scale.

What is needed to be done?

A similar level of the lower burden of tax on all cars will push automakers to work harder on all cost-heads under their control.

It may also be time to explore the idea of road pricing for arterial routes (important routes in a system of roads) in big cities to decongest traffic. Satellite-linked technology can enable this system to implement differential rates.

-Charges could generally vary by traffic density, with vehicles in a hurry billed extra for the use of a speedy express lane and EVs can be given these facilities for free to encourage their use.

Source: This post is based on the article “Time to rethink Indian levies on motor vehicles” published in Livemint on 23 November 2021.