Lower the GST rate on conventional two-wheelers in India? Let’s consider the impact on electric vehicle sales

Two-wheelers are ubiquitous on Indian roads. India’s finance minister recently stated that these vehicles are neither luxury goods nor sin goods and thus merit a Goods and Services Tax (GST) rate reduction. Two things to know: (1) A phased GST rate cut on motor vehicles has been a long-standing ask, repeated most recently at the Society of Indian Automobile Manufacturers (SIAM) annual convention

According to data from SIAM, sales of two-wheelers in India have exceeded 20 million per year since fiscal year (FY) 2017–18. This dwarfs the sales of passenger cars, which were around 3.4 million in FY 2018–19. After a COVID-19 related slump in the first quarter of the current fiscal year, SIAM data shows that wholesale sales of two-wheelers in August 2020 were marginally above sales from a year ago. The trajectory going forward will heavily depend on how the broader economy recovers from the COVID-19 pandemic.

Their widespread popularity, affordability, adaptability, and suitability for electrification make two-wheelers among the lowest hanging fruit for electrifying India’s transport sector. Even though the FAME-II scheme provides an upfront cost subsidy of ₹ 10,000 per kilowatt hour (kWh) of battery size and a preferential 5% GST rate for electric vehicles (EVs), only about 25,000 electric two-wheelers have been sold under this scheme since its inception in March 2019. So far India is well short of the policy target of selling 1 million electric two-wheelers by 2022. This is, in part, because the Indian market is highly price sensitive. To realize the FAME-II targets and all of the associated environmental and public health benefits, additional preferential policies that decrease the upfront cost of acquisition are required, as are EV mandates on manufacturers.

Instead, our analysis shows that a GST reduction for conventional two-wheelers will diminish the cost competitiveness of electric two-wheelers and substantially negate the effect of additional state-level subsidies for EVs. For example, the state of Maharashtra has promised a purchase incentive of ₹ 5,000 for all electric two-wheelers. Additionally, the State Government of Delhi, in its recently released EV policy, has provisioned for an additional purchase incentive of ₹ 5,000 per kWh of battery size for two-wheelers that qualify under the FAME-II scheme. A 10% GST reduction for a popular conventional scooter such as Honda’s Activa will be in excess of ₹ 5,100. This wipes out the added benefit of the Maharashtra EV policy and reduces the benefit of the Delhi EV policy by up to two-thirds, depending on the battery size.

What’s more, our total cost of ownership (TCO) analysis for two-wheelers in Delhi shows that over a 10-year usage term, the Okinawa I-Praise+ costs ₹ 2.13 per kilometer (km) after including all possible national and state incentives. As shown in the figure below, that is slightly less than the ₹ 2.14/km for the petrol-equivalent Honda Activa 6G. However, if the proposed GST of 18% comes into effect, the Honda Activa’s cost per kilometer will decrease to ₹ 2.09/km, making the conventional option cheaper by ₹0.04/km.

And what of the impact on tax revenues? Assuming an average price of ₹ 50,000 and 20 million in sales, lowering the GST on conventional two-wheelers from 28% to 18% would result in a GST revenue loss of approximately INR 10,000 crores annually. Two-wheeler sales would need to increase by more than 50% to compensate for this lost revenue. At the same time, the proposed outlay of the entire FAME-II scheme is ₹ 10,000 crores. In other words, the outlay of the FAME-II scheme could be doubled and used for the outright purchase of 6,000 electric buses or to subsidize 18,000 electric buses for the same price as a one-year GST cut on conventional two-wheelers.

Clearly, reducing GST rates on conventional two-wheelers is counter to India’s goal of promoting transport electrification. The lower GST rates for conventional two-wheelers may or may not provide a near-term boost to sales, but they would almost definitely delay more widespread adoption of electric two-wheelers in India by a few, crucial years. Is it worth it?

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