This was originally published in the Mint.

With the recent rationalization of Goods and Services Tax (GST) rates, taxes on automobiles have undergone a significant structural reform. Whereas vehicles were previously subject to a flat GST rate of 28%, with electric vehicles (EVs) enjoying a partial waiver, the tax has now been restructured to link the rate to two key vehicle parameters: engine displacement and vehicle length. While this reform is expected to boost the auto industry, policymakers could build on these changes by also linking the tax to vehicle emissions—leveraging the GST not only to meet economic objectives, but also to advance India’s ambitious climate goals.

India’s transport sector is both an economic keystone and a significant and growing source of CO₂ emissions. In 2024, an average of 71,000 vehicles were registered daily in India. Battery electric vehicles, subject to a 5% tax rate under both the previous and current GST regimes, accounted for only 7% of these registrations. Amid enduring barriers to widespread EV uptake in India, including high upfront cost, consumer skepticism, and a lack of adequate charging infrastructure, internal combustion engine (ICE) vehicles will continue to make up a large share of the new vehicle fleet through the foreseeable future.

As the government strives to accelerate EV adoption to reach net-zero emissions by 2070, considering CO₂ emissions alongside engine displacement and vehicle length in the determination of GST rates could help promote the uptake of cleaner vehicles. Past ICCT research on passenger cars in India has found that cars with similar engine displacement emit widely varying CO₂ emissions. For instance, cars with engine displacement below 1200 cc, a key threshold under the new GST rates, produce emissions varying between 85 g/km and 149 g/km. Vehicle length is also found to be an inadequate indicator of CO₂ emissions. For example, emissions among cars with a vehicle length of not more than 4 meters, another key threshold, were found to vary between 85 g/km and 161 g/km. These findings suggest that the new GST structure for cars misses an opportunity to more directly promote clean mobility by levying taxes commensurate with vehicle emissions.

An emissions-linked GST structure for vehicles could offer three key benefits for meeting India’s climate objectives.

Firstly, studies by the ICCT have found that vehicle taxation can serve as a key policy lever to influence the adoption of low-emission ICE technologies among consumers. Countries such as France, Ireland, Germany, Singapore, and Thailand have adopted vehicle tax structures linked to CO₂ emissions. The records of these countries show that, if designed effectively, such policies can support the uptake of lower-emitting vehicles. For example, after France adopted its emission-linked fee structure for passenger cars in 2008, the type-approved CO₂ emissions of the new passenger car fleet decreased by 9 g/km (about 6%), which was almost twice the reduction achieved in the rest of the European Union. Meanwhile, certain higher-emitting vehicles witnessed a decline in sales. In the Netherlands, CO₂-based vehicle taxation led to a 6.3 g/km emissions reduction between 2005 and 2012.

Secondly, a CO₂ emission-linked tax structure can be designed so that the fee levied on high-emission vehicles can be used to offer rebates or subsidies for the purchase of low- and zero-emission vehicles. Commonly known as a feebate (or bonus-malus) program, such a system could help the government spur uptake of lower-emitting vehicles while reducing the fiscal burden of incentives on the exchequer. In France, sales of lower-emission vehicles jumped by about 80% after a feebate system was introduced in 2008; through careful policy design, France’s program achieved a positive revenue balance from 2014 to 2022. In Sweden, registrations of new battery electric vehicles surged following the introduction of a bonus-malus scheme in 2018.

Thirdly, since manufacturers have an economic interest in increasing sales and maximizing profits, an emissions-linked GST framework could also serve as a policy lever to nudge vehicle manufacturers to adopt low-emission technologies and continuously improve the environmental performance of their vehicles.

As India strives to achieve net-zero emissions by 2070, supplementing the current GST structure, based on engine displacement and vehicle length, with a CO₂ emissions-linked tax framework could serve as a crucial policy lever. The Government of India has taken a critical step toward differentiating vehicle tax rates for the purpose of stimulating the auto industry and promoting cleaner mobility. With some adjustments, it could more directly encourage consumers to purchase vehicles with lower emissions and vehicle manufacturers to invest in cleaner, more fuel-efficient technologies.