New electric vehicle scheme links lower import duty with FDI

The government has notified the scheme to promote manufacturing of electrically operated passenger vehicles (EVs) in India and issued two notifications 19/2024-Customs and 20/2024-Customs both dated March 15, 2024, exempting the social welfare surcharge and reducing the basic customs duty (BCD) to 15 per cent on imports of EVs falling under the heading 8703 of the Customs Tariff subject to certain conditions. The government hopes the scheme will attract foreign direct investment in the manufacture of EVs.
 

EVs attract a BCD of 100 per cent for those priced above $40,000 per unit and 70 per cent BCD for those priced at $40,000 or less. The latest scheme allows global companies having a minimum turnover of Rs 10,000 crore from automotive manufacturing or investment in fixed assets of minimum Rs 3,000 crore to import 8,000 EVs priced above $35,000 every year for a period of 5 years from the date of obtaining a letter of approval (LoA) from the Ministry of Heavy Industries at 15 per cent BCD, provided they undertake to invest at least Rs 4,150 crore ($500 million) in plant, machinery and factory building for manufacturing EVs within 3 years of obtaining the LoA and also achieve domestic value addition (DVA) of 25 per cent within 3 years from the date of LoA and 50 per cent within 5 years from the LoA date. 

The duty foregone will be capped at Rs 6,484 crore or the committed investment, whichever is lower. The LoA will be issued after the eligible entity submits a bank guarantee for the duty foregone or Rs 4,150 crore, whichever is higher and it will be encashed if the stipulated minimum investment is not made or the prescribed DVA not achieved. The new scheme will be in addition to the Production Linked Incentive (PLI) schemes for EVs and advanced chemistry cells and the two phases of schemes for Faster Adoption and Manufacturing of Hybrid & Electric Vehicles (FAME). The new scheme will be implemented through a Project Monitoring Agency (PMA). The procedural details of the scheme will be notified within 120 days.
 

The government expects a good response for its scheme because the market for EVs is estimated to grow substantially in the coming years. Major foreign EV manufacturing companies now can do some market seeding by importing their EVs at lower BCD, assess the response and then take a call on whether to invest. The domestic automobile manufacturers are of the view that allowing imports of EVs at 15 per cent BCD will not matter much as the imports of only 8,000 EVs priced at $35,000 or more have been allowed and the market for such highly priced EVs is rather small. We have to wait and see how the new incentive scheme works.
 

The intriguing point, however, is why our domestic manufacturers want 100 per cent BCD protection on passenger cars priced at $40,000 and above and 70 per cent BCD protection on passenger cars priced below $40,000. The Society of Indian Automobile Manufacturers says that the passenger vehicles exported in 6 years starting from 2017-18 aggregated to 3,731,839 as against domestic sales of 19,110,583 during the same period. The extent of duty protection and penetration in export markets suggest that we should identify and address the issues that affect our competitiveness. Improving competitiveness can give better results than any amount of protection and incentives.

Email: tncrajagopalan@gmail.com