Tesla given boost as government promises to cut EV import taxes for automakers investing $500 million

India said on Friday it would cut import taxes on certain electric vehicles for companies that commit to at least $500 million (roughly Rs 4,142 crore) in investment and manufacturing capacity over three years, potentially boosting plans by Tesla to enter the market.

The policy is a big win for Tesla as it aligns with what the company has been lobbying for in New Delhi. Sources said last July that the carmaker had offered to build a factory but in the meantime wanted a cut in import taxes, which Chief Executive Elon Musk said were among the highest in the world.

For years, Musk had been trying to break into the Indian market, but New Delhi wasn’t keen unless it committed to local manufacturing. Tesla officials have visited India several times in recent months, with Musk also meeting Prime Minister Narendra Modi last year.

Companies that meet the investment and production requirements will be allowed to import a limited number of EVs at a lower tax of 15 percent for cars costing $35,000 (roughly Rs. 29 lakh) and above. India currently levies a tax of 70 percent or 100 percent on imported cars and EVs depending on their value.

Tesla’s cheapest car, the Model 3, starts at $38,990 (roughly Rs. 32.3 lakh) in New York, according to the automaker’s website. The company did not immediately respond to an email seeking comment.

“We invite global companies to come to India. I am confident that India will become a global hub for electric vehicles and that will create jobs and improve trade,” Commerce Minister Piyush Goyal told reporters at a press briefing after the policy was made public by his ministry.

Goyal said the move will benefit consumers who will get electric cars at a lower cost, while helping the government’s aim to reduce oil imports and hence foreign exchange outflows.

India’s EV market is small but growing, with domestic carmaker Tata Motors dominating sales. Electric models account for about 2 percent of total car sales in India in 2023, and the government wants to increase that share to 30 percent by 2030.

The new policy will open the door for global automakers to enter the world’s third-largest auto market at a time when the growth rate of electric vehicles is slowing, forcing companies to look to newer markets to boost sales.

Vietnamese electric car maker VinFast said it plans to invest $2 billion (roughly Rs 16,577 crore) in India and last month started construction of a local factory in the southern state of Tamil Nadu.

VinFast has also asked the government to reduce import duties on electric cars for about two years so that customers can familiarize themselves with its products until the local plant is up and running.

Policy under development

India has been working on the policy for several months, Reuters reported, despite lobbying by Tata Motors and rival Mahindra & Mahindra, who fear cutting taxes on electric car imports will hurt the domestic industry and its investors.

The aim of the new policy is to “strengthen the EV ecosystem by promoting healthy competition among EV players, leading to high production volume, economies of scale, lower production costs,” the commerce ministry said.

This will open up the Indian auto market to new automakers, suppliers, technologies and the overall EV ecosystem, said Gaurav Vangaal, associate director at S&P Global Mobility.

“Many car manufacturers who are sitting on the fence would now like to enter India. Indian consumers will have a choice to experience global technologies and products on Indian roads,” he added.

Under the new policy, which comes into effect immediately, imports of lower-taxed EVs will be allowed for a maximum of five years and the total number will be limited to 8,000 per year.

The duty waived by the government on imported EVs will be limited to the investment made by the company or close to $800 million (roughly Rs. 6,628 crore), whichever is lower.

The investment commitment made by the company will need to be backed by a bank guarantee that will be used in case the company defaults on the policy obligations.

© Thomson Reuters 2024