By Sheena Sareen
India’s automotive sector continues to be a powerful engine of economic growth. Today, it contributes nearly 7.1% to India’s total Gross Domestic Product (GDP), accounts for almost half of manufacturing GDP, and provides employment to more than 37 million people directly and indirectly. Calendar year 2025 witnessed steady growth across passenger vehicles, commercial vehicles, two-wheelers and three-wheelers, even as two-wheeler sales are yet to surpass their 2018 peak.
Importantly, the electric vehicle segment is now firmly in a growth phase, recording steady expansion across categories, with higher uptake in 2025 compared to 2024 and an even stronger outlook emerging for 2026.
This momentum has been supported by Goods and Services Tax (GST) rate rationalisation measures, brought in through GST 2.0 reforms and series of policy interventions introduced over the last few years, such as Production-Linked Incentive scheme for Automobile and Auto Components Industry in India (PLI-Auto), Prime Minister Electric Drive Revolution in Innovation Vehicle Enhancement (PM E-DRIVE), Scheme to Promote Manufacturing of Electric Passenger Cars in India (SPMEPCI) and PLI for Advanced Chemistry Cells (PLI-ACC).
The Government’s decision to maintain the lowest GST rate on Electric Vehicles (EVs) across all segments, coupled with recent GST rate rationalisation that reduced tax incidence on several key components such as power electronic components, magnetic cores, brake assembly components, etc. from 28% to 18%, has further enabled cost optimisation across the value chain.
Coupled with state incentives support, all measures put together have begun translating into improved affordability.
However, as EV adoption moves from early adopters to mass-market consumers, continued refinements in the tax and incentive framework will be critical to sustain growth and reinforce buyer confidence. With a few targeted refinements in the GST and incentive ecosystem, the full benefit of cost efficiencies can be passed through to end customers, aiding affordability and demand.
Structural opportunities for strengthening the current framework
1. Inverted Duty Structure under GST
Simply put, an inverted duty structure arises when input tax credits exceed the GST payable on outward supplies (other than exempt or nil-rated supplies). EVs attract a lower GST rate compared to many of their inputs and components, resulting in an inverted duty structure.
Compounding this, the existing refund mechanism does not allow liquidation of input tax credits relating to services and capital goods used in manufacturing. This leads to accumulation of blocked credits, impacting production costs. Allowing refund of such credits would improve supply chain efficiency and affordability for consumers.
2. Mandatory cash payment under Reverse Charge Mechanism (RCM)
Under the current GST framework, tax payable under RCM must be discharged in cash, even where sufficient input tax credit is available. Globally, several jurisdictions permit ITC utilisation for discharging RCM liabilities without cash outflow. Permitting similar flexibility in India would ease working capital pressures across manufacturing supply chains while remaining revenue neutral for the Government.
3. High GST on battery charging and swapping services
Battery charging and swapping, which are key enablers for EV ecosystem scalability, presently attract GST at 18%, significantly higher than the tax rate on EVs themselves. Aligning the tax rate on charging and swapping services with the EV rate would reduce operating costs, improve last-mile affordability and aid infrastructure adoption.
Recalibrating incentive frameworks for the next phase of growth
PLI-Auto scheme has played a pivotal role in attracting investments into domestic automobile and auto-component manufacturing. As the industry now prepares for its next growth cycle, a timely recalibration of the policy framework will be important to sustain momentum and broaden participation. Key areas for consideration include:
- Rationalising Domestic Value Addition (DVA) thresholds to reflect current supply chain maturity
- Revisiting minimum investment requirements to broaden participation
- Ensuring time-bound disbursal of approved incentives to improve investor confidence
- Lesser year wise targets and greater reliance on GST and customs data for verification purposes
Such refinements will strengthen domestic manufacturing capability, reduce import dependence and support cost-efficient production of EVs at scale.
In parallel, industry is advocating for a dedicated incentive framework to promote domestic R&D in EV technologies. Targeted support through capital subsidies, tax incentives and research funding can accelerate localisation of advanced technologies, reduce reliance on imported intellectual property and lower long-term production costs.
This will be essential to align with evolving Corporate Average Fuel Efficiency (CAFÉ) norms and India’s broader clean mobility ambitions.
Building domestic capability in next generation EV technologies
Critical segments such as battery chemistry, Advanced Driver Assistance Systems (ADAS) and end-to-end vehicle architecture remain at a nascent stage in India’s EV supply chain.
Industry awaits the Global Value Chain (GVC) Scheme, which is expected to have an incentive outlay of approximately INR 7,000 crore to support localisation and build a resilient global value chain for advanced automotive components. In addition, subsidies for capital goods such as moulds and power tools used in auto-component manufacturing are envisaged to strengthen domestic production capabilities.
Looking ahead to Budget 2026
Budget 2026 presents a timely opportunity to reinforce the automotive sector’s growth trajectory. By fine-tuning the GST framework further, strengthening incentive design and accelerating localisation of critical technologies, policymakers can unlock the next phase of scale and affordability in electric mobility.
Sheena Sareen is a partner at Deloitte India
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.”