With promotion of clean energy high on government agenda, the upcoming Budget is likely to incentivise manufacturing of electric vehicles (EVs) in the country. This is also expected to drive foreign direct investment or FDI into the country. In line with the government’s road map for EVs in the next four years, the Budget may offer investment-linked incentives to manufacturers with respect to capital expenditure incurred for setting up operations, according to officials in the know. “With a clear timeline to switch to clean energy vehicles, we are examining tax incentives to encourage players into the EV segment. Besides operations, investment in technology transfers and R&D will also need to be encouraged,” said a government official. The Budget for FY20 may allow deduction on account of capital expenditure incurred for setting up business under Section 35AD(1) of the Income Tax Act for environment friendly EVs. The move will help bring down tax liability of such firms, leaving them with more income to invest in technology transfers. ALSO READ: Auto stocks decline post NITI Aayog's directive on electric vehicle The move goes in hand with other measures to promote the sector, such as proposed reduction in the goods and services tax (GST) rate for EVs to 5 per cent from 12 per cent and that for its batteries from 18 per cent to 12 per cent. The matter is currently with the fitment committee and a decision will be taken on this in the next GST Council meeting. The government is also examining extension of tax holiday for units operating or planning to set up operations in special economic zones (SEZs), beyond the sunset date of 2020, for a few sectors, including EVs. The move will encourage foreign EV players with expertise to set up manufacturing base in the country and export to rest of the world. It will also aid swifter skill transfer to domestic players. Section 10AA of the Income Tax Act, 1961, provides for tax exemption on profits made from export by a unit set up in an SEZ.
The exemptions include deduction of 100 per cent export-related profit for first five years and 50 per cent for the next five years.“With manufacturing activity in the slumps at the moment and domestic investment weak, extension of the sunset clause for SEZs becomes imperative,” said another government official. ALSO READ: Govt refuses to budge on electric vehicle deadline for 2- and 3-wheelers Faster technology adoption for the EV sector could be encouraged to provide economies of scale by lowering the withholding tax rate to 5 per cent or lower for tech transfers. “Tech and knowledge transfers are going to be the key, going forward, to scale up electric vehicle manufacturing. Economies of scales will be needed to end up with a reasonably-priced end product,” said the official. The government may also rationalise customs duties on EV components, such as brake systems, electric compressors, chargers and battery packs, which currently attract around 15 per cent GST. “Providing tax incentives to EVs can serve the twin objectives – to boost the Indian economy’s growth by improving manufacturing and employment, and secondly to address environmental concerns. As tax costs are the key drivers for investment decisions, this is the opportune time to incentivise the EV sector with tax incentives,” said Rakesh Nangia, managing partner, Nangia Advisors (Anderson Global). ALSO READ: Automakers run into collision with Centre's electric vehicle plan Fiscal incentives, including tax credits and tax exemptions, are a major tool for decreasing the upfront costs of EVs and encouraging the technology’s adoption, he added. “Tax incentives in the Budget will encourage original equipment manufacturers and component makers to invest in the sector,” said Sohinder Gill, director general, the Society of Manufacturers of Electric Vehicles (SMEV) Meanwhile, the ministry of road transport and highways has proposed to do away with registration fees for battery-operated vehicles or EVs, to create an enabling ecosystem for adoption of such vehicles. Two, three and four-wheelers, which are battery operated, will not have to pay fees for issuing or renewal of a registration certificate, according to the proposal. NITI Aayog has prepared a road map for making it mandatory to sell only EVs after 2030. Also, all two-and three-wheelers should go electric from 2023 and all commercial vehicles by 2026, according to the plan. It is aimed at combating air pollution, boost employment, lower dependence on oil and give a fillip to manufacturing.