EV Loans, Lower GST & FAME-III Clarity: What EV Industry Wants From The Interim Budget

EV Loans, Lower GST & FAME-III Clarity: What EV Industry Wants From The Interim Budget

SUMMARY

At a time when EV adoption is on the rise in the country, the industry is hoping the government would make some major announcements in the Budget to further propel the growth

The long-standing demand of slashing GST rate on batteries to 5% from 18% was echoed by most of the EV sector players Inc42 talked to

With EV adoption picking up pace, EV players are seeking clarity on FAME-III and want the government to incentivise charging and battery swapping infrastructure

India’s electric vehicle (EV) industry has grown by leaps and bounds over the last two years with 2023 becoming an important year in the growth story. Despite multiple hits and misses in terms of government policies and business prospects, registrations of two-wheeler EVs grew 34% YoY in 2023. 

While the rise in registrations was slower than the years before, many see it as a sign of maturity. 

Now, with the Indian government set to announce the interim Budget on February 1, the EV industry is brimming with hopes for the government to make some major announcements around the existing policies that support its growth further.

Among the biggest expectations is the extension of the existing FAME scheme to lower and standard goods and services tax (GST) applicable across EV products and services. 

However, we must note that this is not the first time the industry is looking at these policy-level changes. Even during the last Union Budget in 2023, the EV industry had the same demands, which remained unfulfilled.

On the other hand, though the industry expects many changes, it is pertinent to note that 2024 is an election year, and Finance Minister Nirmala Sitharaman may decide not to make many new announcements in the interim Budget. As such, the EV industry might have to wait a few months till the full Budget is announced post-general elections.

Speaking to Inc42 on the interim budget expectations, Varun Goenka, CEO and cofounder of Chargeup said that the industry wants the government to take multiple steps to sustain the momentum in the EV industry. 

“These steps encompass addressing challenges such as high GST rates and the lack of affordable financing for building EV infrastructure, including Battery-as-a-Service facilities, charging stations, and undertaking research and development,” said Goenka.

“While it remains unclear whether these steps will be included in the interim budget or if the industry player will need to wait until the annual budget after the elections, they are crucial for the industry,” he added.

All Eyes On GST Standardisation

Currently, the EV original equipment manufacturers have to pay a 5% GST on the sale of vehicles while the GST rate on batteries and certain services continues to be 18%. The industry had kept its demand earlier as well for making a 5% GST standard for all EV players, which has remained unfulfilled.

Speaking to Inc42, most EV players said that bringing down this GST rate would be crucial in the building of the entire ecosystem.

“We expect the government to reduce GST applicability on EV products and services, and to include the EV as well as battery development, charging networks, and allied services in the priority sector lending list. This would open the doors for investments in the ecosystem, and accelerate India’s EV adoption,” said Goenka.

Speaking on a similar note, Sheetanshu Tyagi, CEO and cofounder of EMO Energy said, “For us as a battery company and for most EV companies today, the biggest issue is that working capital and the cycle becomes very long – starting from buying cells to implementing them in a vehicle and then the GST credit return for 18% versus 5%… If there is anything the government can do to expedite the whole process, that can be the biggest relief for us, from a buying perspective.”

So, there is an increasing demand from battery manufacturers to slash the import duties on cells as well.

It is pertinent to note that during the Union Budget last year, the Centre showed an increased focus on lithium-ion (Li-Ion) cell manufacturing. The government extended the customs duty exemption on the import of capital goods and machinery required for the manufacturing of Li-ion cells needed for EV batteries. 

While 100% custom duty exemption was announced on the import of capital goods and machinery for Li-ion cells, this only applied to the import of components for cell manufacturing but not to cells for the manufacturing of battery packs. Though there is a 5% relaxation for the import of cells if a company is registered as a pack manufacturer, most battery pack manufacturers today do not have such registrations, said Tyagi.

Hence, he believes that along with GST, there is also a need to ease the taxation on imports of battery components and reduce customs duty for cells and other key components.

“Most of these components today come from China, not just for us but for every country in the world. So, to accept that process and not just fight it and then create a whole subsidy around that process will be very critical,” he said. 

Mayank Bindal, founder and CEO of Snap-E Cabs that under sustainable programs, the industry expects slashing of the GST rate on batteries from the current 18% rate to 5%. 

“Since the cost of batteries is 40% of the overall car, we expect that to be reduced, and therefore making the cars much cheaper,” Bindal added.

The Fate Of FAME

While there are varying opinions on whether FAME-II will be extended or a new third phase of the FAME policy will come into effect, it goes without saying that the EV industry is now unanimously demanding policy changes that would enable holistic development in the ecosystem.

For instance, while vehicle manufacturing and charging infrastructure companies could largely reap the benefits of FAME so far, the government is now expected to become more battery and ancillary component focussed in its policies by reducing the import duties, GST rates, and introducing demand incentives.

Simply put, FAME-II is one of the most speculative discussions in the EV ecosystem today. The demand incentive scheme is coming to an end in March 2024, so there is some nervousness. Despite its shortcomings, the FAME scheme has significantly driven India’s EV growth story over the last few years. 

While some industry leaders believe that EV players must learn to now survive without subsidies, others say some sub-sectors are still in need of government subsidies.

As per reports doing rounds, a third phase of FAME, or FAME-III, would be the most likely decision taken by the government soon. 

According to Tushar Choudhary, founder and CEO of Motovolt Mobility, “Given the clear indications surrounding the unveiling of FAME-III, what we might witness is a short-duration extension of the scheme coverage for another quarter or two, followed by the full-fledged announcement of FAME-III after the general elections.”

“Alternatively, the government might choose to let FAME-II conclude, and announce FAME-III after the elections. In the meantime, other highly anticipated announcements, such as the reduction of interest rates on EV vehicles and additional financial support to the ecosystem, might be made,” he added.

Irrespective of when the scheme is announced, many in the industry believe that it would be revised to increase focus on electric buses, trucks, and electric cars, along with electric two and three-wheelers.

The biggest change that is anticipated in FAME-III is more focus on four-wheelers and buses since the public transportation needs to be converted into EVs, said Snap-E’s Bindal.

The FAME-II scheme provided a subsidy of INR 20,000 per kWh for electric buses and aimed at incentivising the deployment of 7,090 electric buses. 

As per the data provided by the Ministry of Heavy Industries (MHI) in December 2023, various state transport and city transport undertakings, as well as municipal corporations, had placed supply orders for 3,390 buses under the FAME II scheme. A total of 3,037 units of those e-buses were deployed.

In January, government-run Convergence Energy Services also floated a tender to procure 4,675 electric buses under the National Electric Bus Programme. 

In fact, with a total outlay of INR 10,000 Cr, FAME-II was also slated to support 10 Lakh electric two-wheelers, 5 Lakh electric three-wheelers, and 55,000 electric four-wheeler passenger cars through subsidies.

The scheme has incentivised the sale of 11.53 Lakh units of EVs in total with subsidies amounting to INR 5,228 Cr till December 1, 2023.

FAME Incentives For Charging Infrastructure

Meanwhile, the industry is also looking forward to a scheme that would incentivise charging and battery-swapping infrastructure. On the charging infrastructure side, the existing FAME-II had sanctioned 2,877 EV charging stations for 68 cities across 25 states/UTs, along with 1,576 EV charging stations for nine expressways and 16 highways.

According to the MHI, 148 EV Public Charging Stations (PCS) were commissioned by December.

To enable growth in this overall ecosystem, the EV industry has long back put forward its demand to include battery development, charging networks, and allied services in the priority sector lending list, which the government is yet to approve.

While the government might not announce any major policy decisions given that this is an interim budget, some financial stimulus for the growth of EV infrastructure and regulatory guidelines on EV standardisation are expected to be announced, said Motovolt Mobility’s Choudhary. 

What Else Do EV Players Want? 

Besides a relief on tax and an extension of the FAME scheme, there are a few other policy-level changes the industry is expecting for the allied sectors.

Motovolt’s Choudhary said that a reduction of interest rates on EV loans for buyers, as well as financial support for companies involved in building EVs, EV batteries, and charging infrastructure, are anticipated in the upcoming budget.

Some also believe that proper rule demarcation is required to make the existing or new schemes sustainable.

EMO Energy’s Tyagi said, “If FAME-III does go into effect, making sure that the right people get it… the qualification process and finally getting the money, making sure the benefits are beyond the vehicle OEMs, would be key.”

Tyagi’s comments can be read in the context of the entire FAME-II fiasco that took place in 2023, leading to penalties on several EV two-wheeler players, which also damaged the pace of growth for the industry.

With the vehicle manufacturing space now largely subsidised and having picked up pace, the policies in strengthening the broader ecosystem – from EV charging and swapping to EV finance – would play a critical role. 

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