GST panel recommends higher tax for luxury EVs; big blow for Tesla, BYD

A tax panel has recommended substantial increases in consumer levies on luxury electric vehicles (EVs) priced above $46,000, according to a government document. This proposal is expected to affect sales for major carmakers such as Tesla, Mercedes-Benz, BMW, and BYD, whose vehicles are predominantly imported rather than domestically manufactured.

According to a report in Reuters, the panel has suggested hiking the Goods and Services Tax (GST) for EVs priced between $23,000-$46,000 from 5% to 18%. For vehicles priced above $46,000, the recommendation is to impose a 28% tax, targeting what the document describes as the 'upper segment' of society, the report added. Simultaneously, the government plans to abolish the 28% tax rate, potentially placing these vehicles under a proposed 40% category for luxury goods.

The GST Council, which includes members from all states and is led by the federal finance minister, is scheduled to meet on September 3-4 to consider these proposals. The Council holds the final decision-making authority on tax adjustments, and its response to the panel's recommendations remains awaited.

The potential changes are part of a broader effort by Prime Minister Narendra Modi's administration to overhaul the nation's tax structure and promote domestic goods. Modi's government has already endorsed significant cuts in GST rates on several products, ranging from shampoos to electronics, as part of this reform agenda.

However, the proposed GST increase on high-end EVs aims to spotlight the distinction in taxing higher-priced vehicles. According to the tax document, "The uptake of electric vehicles is increasing and while the low rate of 5% is to incentivise faster adoption of electric vehicles, it is also important to signal that higher-priced EVs can be taxed at higher rates," highlighting the rationale behind the proposal.

The announcement has already had ramifications in the stock market, with the Nifty Auto index experiencing a 0.5% decline following the news. Domestic automakers such as Mahindra & Mahindra and Tata Motors saw their shares fall by nearly 3% and 1.2%, respectively. While these companies have limited offerings in the affected price range, the proposed tax hikes could impact their future strategies.

India's EV market, though relatively small with EVs accounting for about 5% of total car sales between April and July this year, is growing rapidly. During this period, EV sales surged by 93%, reaching 15,500 units. Tesla, which recently introduced its Model Y in India with a base price of $65,000, and opened two showrooms, could be significantly impacted due to the existing high tariffs on imported cars.

In July, Tata Motors held a leading position in the Indian electric car market with nearly a 40% share, followed by Mahindra at 18%. BYD accounted for a 3% market share, while Mercedes-Benz and BMW together made up 2%. Tesla, despite taking bookings, has not yet commenced deliveries in the country.