Promoting Electric Vehicles in India: Revenue Implications May Lead to Budget Strains for Government
In the current scenario of increasing consumer convenience, private vehicle ownership has become a common occurrence. In this regard, it has become important not to ignore the environmental implications of the use of personal vehicles (such as exhaust emissions of pollutants from vehicles and urban air pollution). Society as a whole bears the costs of environmental externalities associated with vehicle emissions in terms of morbidity and mortality from exposure to air pollution. To reduce the environmental impacts of motor vehicles, governments offer various incentives for consumers to adopt electric vehicles (EVs). Compared to fossil fuel vehicles (FFVs), electric vehicles are considered an environmentally friendly option.
The costs of EVs are relatively higher than those of FFVs, which often influences consumers’ decision in favor of FFVs. Although running costs are relatively cheaper over the life of an EV compared to FFVs with similar characteristics, consumers often prefer FFVs over EVs due to the initial price difference between EVs and FFVs. Thus, to make electric vehicles attractive to consumers, the Union and state governments offer various incentives (eg tax incentives, subsidies).
In the 2019-2020 Union budget, a tax benefit scheme is introduced for the first buyer of electric vehicles with a deduction of Rs. 1.5 lakh under Article 80EEB of the Tax Law on income against payment of interest on loans taken out to purchase an electric vehicle. could be to reduce urban air pollution. The implications of these incentives for incomes cannot be ignored.
Other electric vehicles are exempt from road tax and registration fees. For example, in Delhi the road tax is levied under the Delhi Motor Vehicles Taxation Act, 1962 and ranges from 4 to 15 percent of the cost of the vehicle. Many states like Delhi, Andhra Pradesh, Kerala and Telangana have removed the road tax on electric vehicles and thus end up losing revenue. Registration fees are another charge payable at the time of vehicle registration. For passenger cars, it is set at Rs. 600 per vehicle; but for the promotion of electric vehicles, governments are also forgoing this source of revenue.
The GST rate for gasoline and diesel cars is 28 percent. Along with this, depending on the displacement of the FFVs, an additional GST compensation tax is payable, ranging from 1% to 22% of the vehicle price. The GST rate on electric vehicles is 5%. It is expected that with greater penetration of electric vehicles in the passenger car segment, the collection of the GST (as well as the collection of the GST compensation tax) will decrease. For example, for each additional EV sold, the lost GST revenue would be between 24 and 45 percent of the cost of the vehicle. For some states like Andhra Pradesh, this loss is even higher because the state offers a 100% refund of the GST (SGST) paid by the state on the purchase of an EV.
The revenue implications of the transition to electric vehicles are not limited to the revenue side of the budget alone; The expenditure side of the budget also bears the burden in terms of various subsidies given to electric vehicles. For example, the Department of Heavy Industries launched FAME 2 (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) in 2019 to drive adoption of electric vehicles. The program is extended until March 31, 2024. Under the revised program rules, electric two-wheelers will receive a subsidy of Rs. 15,000 per kWh of battery capacity and up to a maximum of 40% of the total price of the vehicle. Likewise, the electric 4-wheeler will receive a subsidy of Rs. 10,000 per kWh of battery capacity and up to a maximum of Rs. 1.5 lakh per vehicle. It is obvious that such subsidies will place an additional burden on the public purse.
The loss of revenue is not only limited to the adoption stage of electric vehicles, but it will be realized throughout the life of an electric vehicle. Governments will forgo revenue due to taxes on sales of fossil fuels (eg gasoline, diesel, CNG) to motor vehicles. Since July 1, 2021, the Union excise duty on gasoline is Rs. 32.90 per liter and on diesel it is Rs. 31.80 per liter. Along with this, there is a 30 percent VAT on gasoline and 16.75 percent on diesel (excluding Rs. 0.25 / liter Air Ambiance Charge) in Delhi. This implies that if a liter of gasoline and diesel is consumed less; governments will forgo revenues of Rs. 56 and Rs. 45 respectively. With greater penetration of electric vehicles, this revenue loss will increase. On the other hand, what governments earn on electric vehicles is 5% GST applicable on charging stations for electric vehicles. In addition, there is no electricity tax (ranging from 5-10% in all states) on electricity consumed at electric vehicle charging stations. In addition to the direct revenue implications, in many states electricity is not billed according to the cost of providing electricity. Therefore, governments will forgo their revenues by providing a subsidized supply of electricity to electric vehicle charging stations.
There is no doubt that the transition to electric vehicles would be beneficial for the environment as well as for the prospects of urban public health. However, the revenue repercussions of the transition to electric vehicles can lead to fiscal strains for governments. With the increasing penetration of electric vehicles in the road motor vehicle fleet, the tax burden will increase. Therefore, having a budget management plan in place in advance can help governments overcome budget challenges. Governments may consider reducing spending in the provision of public goods and services and / or increasing revenues from alternative income sources to deal with budget pressures. One income restructuring option could be increasing electricity taxes and / or removing electricity subsidies. The introduction of a mobility tax (a tax based on kilometers traveled by vehicles) and congestion charges can help governments offset lost revenues. The aim of any new tax policy would be to force electric vehicle users to pay a fair share of the income because they have the ‘ability to pay’, otherwise those who do not own a personal vehicle will subsidize those who use electric vehicles. .
Mr. Pragya Jain also contributed to this article
Sacchidananda Mukherjee is a guest contributor. The opinions expressed are personal.