By: Dr. Waman Parkhi, Bhavana Banker, with inputs from Nishant Verma
India’s commitment under the Paris Agreement and subsequent announcements, is to reduce the carbon emissions significantly by 2030; and to become net-zero by 2070. Road transportation is significant contributor to carbon emissions, with studies indicating that 70-80% of the air pollution in Indian cities is on account of vehicles.
It is therefore important that significant tax incentives be given to foster the manufacture and sale of New Energy Vehicles (‘NEV’) in India, to reach closer to the targets.
Over recent times, government schemes (like PLI, FAME, EMPS etc.) have provided incentives for accelerated shift to Electric Vehicles (‘EV’). Below are few suggested income-tax measures which the Government can consider to further incentivise this shift. These suggestions are also based on certain unique income-tax incentives offered in other countries.
Considering the increased interest in Hybrid vehicles due to its distinct advantages (and the fact that Hybrids would facilitate gradual transition to Battery Electric Vehicles in a few years’ time), it is important that the tax incentives cover all these types of alternative vehicles, and not just EVs. Hence, the first and important suggestion would be that the definition/ criterion of an EV should be modified in the Income-tax Act (ITA) to cover all NEVs including hybrid vehicles as well as those running on alternate green fuels.
The other suggestions for consideration, from NEV buyers’ standpoint, would be:
- Exclusion as a taxable perk- In certain countries such as Sweden, Finland, Spain, there are exemptions given from taxability in hands of employee, of the employer-provided EVs. A suggestion would be to provide similar exemption to the perquisite, being NEVs which are provided for use by the employer company.
- Accelerated depreciation – Many European companies have either reduced the period of amortization or increased the rate of depreciation. Such an incentive in India could be very attractive especially for businesses having fleet of rental cars.
- ‘Tax Credit’ directly for individual buyers – Few countries like Unites States, have come up with a proposition where the government offers a ‘tax credit’ on purchase of EVs. India also can consider implementing a system to grant a proportion of vehicle purchase cost (say 5%) as a pure ‘income-tax-credit’ which will be available to the individual against his / her income-tax liability. This will help bridge the cost gap between NEVs and ICE vehicles to a certain extent.
From the vehicle manufacturer / OEM’s standpoint, following measures can be considered:
- Research & Development – Investments in R&D are crucial to accelerate deployment of clean technologies and drive innovation. Countries such as Japan and certain European countries have successfully adopted tax incentive measures to boost R&D. It is suggested that income-tax deductions (similar to the erstwhile ‘weighted deduction’ regime) may be introduced specifically for such focused R&D spend on NEVs.
- Incentivizing skill development – New technologies require significant investment in upskilling of the workforce. A deduction provision, similar to section 80JJAA of ITA for hiring new workmen, which provides an additional deduction on costs incurred on skill development could help the OEMs in a big way.
- Incentivize capex by way of foreign investments – Similar to the erstwhile section 194LC of ITA, Government may consider introducing measures to incentivize capex funding through overseas debt, by prescribing a lower tax rate on interest payments on such debt. This could potentially bolster investments by many multinational groups looking at India as a potential manufacturing hub for NEVs, especially where the tax rate on such interest in the residence country is lower or nil.
The automobile sector has high hopes from the government, as the industry stands at the cusp of transition due to technological shift and changing consumer preferences. It would be interesting to wait and watch what announcements are in store from the Finance Minister, in the Budget to be presented on July 23.
(The authors: Dr Waman Parkhi, is Partner and Lead Automotive sector (Tax), KPMG in India; Bhavana Banker and Nishant Verma are Chartered Accountants)
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
