Government subsidy on premium passenger electric cars!
Without any cap on ex-showroom price, low GST rate of 5% on electric passenger cars is also working as subsidy on premium purchase. Incentivizing electric car is a step in right direction to control local level air pollution, but not for premium or luxury cars.
On 1st August 2019, Federal Indirect Tax body – GST Council, has reduced GST incidence on electric vehicles from 12% to 5%. Purpose of GST reduction is to create demand for electric car, which have zero tail pipe emission, through tax incentive. This is because current battery electric vehicles (BEV), are way too expensive than the conventional internal combustion engine (ICE). So, incentive has been put in place to bridge the cost barrier.
On 9th July 2019, Hyundai has launched Kona Electric SUV powered by a 136 PS electric motor, a 39.2kWh lithium-ion battery with ARAI certified range of 452km. It was Priced at ₹ 25.30 lakh and from 1st August 2019, price was reduced by 1,58,142 ₹ to 2,371,858 ₹, due to above mentioned GST revision.
To keep price competitive, Hyundai brings Kona electric to India as a CKD (completely-knocked-down) unit, and later assembles it at their Chennai plant, so it attracts lower custom duty in comparison to CBU (completely-built-up) unit.
Within Hyundai’s petrol SUV portfolio, Kona Electric is the most expensive, but the least taxed one, because of current GST structure.
As per current tax structure, cars longer than 4m in length are considered as symbol of conspicuous consumption and hence attract additional minimum cess of 15% over basic GST of 28%.
As Kona Electric is longer than 4m, so ideally, it should be in tax bracket of – 28% basic GST + 15% cess, just like other stable mates. Now, since governments (Central & State) wants to promote electric cars to control local level pollution, it is incurring GST revenue loss of roughly 8.6 lakhs ₹ on every Kona electric SUV sale.
This is just the tip of iceberg. Just imagine, if other luxury car makers starts bringing in their electric SUV through CKD route. So, here we tried to estimate the revenue loss governments (GST is shared among Central & State Government) will suffer.
These figures are staggering. To put things in perspective, till July 2019, Hyundai has dispatched 42 Kona Electric to dealers across India. Subsidy on these cars will be equivalent to cost of five lowest priced (including GST) electric buses, finalized for State Transport Unit through competitive bidding process.
Electric buses used for public transport will control air pollution at much larger scale than premium cars used for personal purpose. Subsidy on premium or luxury BEV can be better used for public transport BEV to amplify the benefits of BEV. Hence, Ministry of Finance needs to take urgent course correction.
Solution is not far away, all they have to do is to take a leaf out Department of Heavy Industry (Government of India), which is responsible for FAME II. In terms of incentive, FAME II scheme seems to be overall well calibrated, as it takes into account several factors, including cap on ex-factory price.
15 Lakhs ₹ cap looks good. In 2018, as per estimates, almost 94% of cars were sold with a price tag (Ex-Showroom) of less than 15 Lakhs ₹.
This essentially shows, that the purchasing power of buyers is largely confined under 15 Lakh ₹. So, subsidizing anything above 15 lakhs will not lead to mass adoption, rather it will act as subsidizing premium or luxury products.
Though currently available BEV under 15 lakhs ₹, seems to be underpowered, with low driving range and seems to be less appealing (based on low respective-market segment share of their donor ICE car).
But aren’t they still good enough to be used for intra-city shared mobility, where average driving speed is still low (less than 30 kmph in most of the cases)?
Subsidy from tax payer’s money should always be meant for bigger cause and need to be well calibrated, and of course – never for conspicuous consumption. For electric vehicle GST rate, move to put a cap on ex-showroom price of EV, will also push automakers for localization (to prevent substitution of crude oil import with battery import in India), also, to come up with EV that are more affordable and thus suitable for mass adoption. Rather than having few niche products, mere for technology demonstration.
Potential electric car buyers seeking performance orientated cars don’t even need subsidy from Government.
Operational CO2 footprint of Kona Electric
In India, since Government and car companies do not provide CO2 emission data on their website, so, for our study we referred to data from the UK Government agency – https://carfueldata.vehicle-certification-agency.gov.uk/. Readers need to understand that the UK follows Euro6 emission norms, which is far more stringent than India’s current BS4 emission norms.
Since 75% (2017-18 – Source : https://en.wikipedia.org/wiki/Electricity_sector_in_India) electricity is generated by coal fired power station, electric cars drawing power form the grid will also have operational CO2 footprint. So here we calculated the operational CO2 emission equivalent if charged hypothetically from the Indian power grid, based on average CO2 emission of power plant that feeds electricity to Grid (gm/kWh).
Result is not quite encouraging. Specially, when we compared it with petrol (Euro6 compliant) i20 form UK. Hypothetically, if UK specific Kona electric draws electricity for charging battery from Indian Power Grid, it will have similar operational CO2 footprint as that of UK spec EU6 compliant Hyundai i20.
Essentially, it is not solving the universal pollution conundrum in India, and just keeping air pollution in check at local level. But this is not Hyundai’s fault, as they don’t produce electricity in India. Rather it is a bold move on their part to introduce an electric car which has a good range, performance and keep air pollution in check at local level.
Tesla India Entry
On a side note, for those eagerly anticipating entry of Tesla in India, should also need to know, that Tesla shall be in a niche luxury segment (market size of 40,340 units in 2018), just like Apple iPhone in smart phone market. Hence, would be in reach of limited few, thus will not lead to mass adoption of BEV to control local level air pollution. So, Government needs to count on mass market carmakers (existing or new comers) for mass adoption of BEV in India.
Tesla is a pioneer, of not mere electric car, but also in several upcoming revolutionary technologies in automotive world. And if you look from Tesla’s perspective, right now their plate is quite full, as they are struggling to make enough cars to meet demand in USA, Europe and most critical BEV market – China, where lies the real demand for BEV and opportunity to make profit, currently they are losing money on every car sale.
Business case is quite simple for Tesla, look at the graph below, which market is more attractive from luxury car demand perspective?
Market segment : BEV
Especially, when Tesla makes only BEV.
Moreover, to overcome the high custom duty barrier (110% for CBU – originally meant to generate employment in India), to price the products competitively, they need to set up assembly unit (or to have contract manufacturing arrangement) for relatively insignificant volume in their larger global scheme of things.
Also, sourcing restriction on single brand retail (30% local sourcing – originally meant to generate employment in India), means their existing business model needs a lot of tweaking.
(The article is written by Rohan Rishi. You can connect with him at email@example.com)