Union Budget 2023: Can hybrid vehicles provide the push for EV adoption?

In 2022, the automobile sector recorded milestone sales of 1 million units of electric vehicles (EVs), contributing close to 5%[1] of overall automobile sales. While there is positive growth momentum in EVs, considering the slew of measures extended by the Government, there still seems to be a long road ahead. Inadequate charging infrastructure, unavailability of raw materials, low customer preference due to the high cost of ownership of EVs, etc., are some of the hurdles which may take some time to be addressed.

Hence, any attempt to directly shift to EVs from Internal Combustion Engine (ICE) vehicles does not seem plausible in the short run. Therefore, there is a need to provide a policy push for other green vehicle technologies, such as strong hybrid, flex-fuel engines, and hydrogen cell technology vehicles, considering their environmental benefits, for an interim period till the adoption of EVs becomes easier.(Tax breaks, jobs or plan to beat China: What will Budget 2023 offer? Click to know)
Hybrid vehicles which combine ICE engines and electric motors working together offer many environmental benefits, in the form of energy conservation, fewer carbon emissions, etc. Strong hybrid vehicles are also coming up as a better bet for the customers considering the low operational cost, no range anxiety and no infrastructure required for charging the batteries.

They would aid in accelerating customer acceptance towards EVs and thus contribute to a quicker transition to EVs in the long term. Thus, all in all, the push for these vehicles seems to be a win-win for the Government, automakers as well as customers.

In furtherance of this objective, there is a pressing need for a reduction in the applicable GST on strong hybrid vehicles. Currently, similar to ICE vehicles, strong hybrid vehicles are covered under the highest GST slab rate of 28% along with an additional levy of compensation cess of up to 15%. This leaves little to no arbitrage between ICE and strong hybrid vehicles, thus not making them attractive to customers. Hence, a lower GST rate as offered on EVs should also be extended to strong hybrid vehicles.

Additionally, the Government should cover strong hybrid vehicles and other green vehicles for several supply and demand side incentives available on EVs. The PLI scheme for EVs that was launched in 2020 should be extended to cover strong hybrid vehicles. Considering that at present only part of the total allocated budget of INR 57,042 cr[2] for auto PLI has been allocated for PLI for EVs, the remaining budget could be allocated to incentivize manufacturing of strong hybrid vehicles.

Further, while the scheme for Faster Adoption and Manufacturing of Electric Vehicles – II (FAME – II) covers EVs of all segments, for strong hybrid vehicles only the 4-wheeler segment is presently covered. Thus, the FAME-II scheme should be extended to cover strong hybrid vehicles of all segments. Further, the applicability of this scheme should be extended beyond 31 March 2024, to enable industry and the public to imbibe its benefits.In addition to the central-level initiatives, most States have also come up with their separate EV policies extending special incentives for EV manufacturing, etc. While some States like Haryana are already extending such incentives to hybrid vehicles under their EV policies, this practice is not consistent across all States. Thus, to enable a long-term transition to e-mobility, the EV policies of all states should include specific incentives for strong hybrid vehicles.

Besides these measures, a special PLI scheme for charging infrastructure development, and a service-linked incentive scheme for services relating to EVs such as testing, certification, etc. could aid in fast-tracking the creation of an ecosystem for EVs in India. Additionally, there is also a need for Government support in the form rebate or incentives for research and development relating to EVs.

2022 has been a good year for the Indian automobile sector, with a 15% YoY[3] growth in retail sales of vehicles, and passenger vehicles surpassing the pre-covid sales numbers. However, there are still obstacles hurting the rising trajectory of the sector such as supply chain concerns, geo-political issues, high interest rates and soaring inflation. In the wake of these issues, there is a need for support from the Government to ensure continued growth of the sector in the near future.

(By Dr. Waman Parkhi, Partner and head Automotive sector (Tax) for KPMG in India)