What can Budget 2022 do to incentivise growth of EV sector?

By Santosh Janakiram and Lakshmi Prakash

India has begun its acceleration of the growth of the electric vehicle revolution. In 2021, more electric vehicles have been purchased in India, compared to what was purchased collectively in the past 15 years. To facilitate the growth of EV section (which will also be a key factor in achieving green transportation to meet the promise of India being a net zero emissions by 2070 in the COP26 climate summit held at Geneva), below are some critical points which should be addressed in the upcoming budget:

Taxes

• Uniformity of GST: Currently, differential GST is levied for spare parts (the lithium ion batteries) while 5 per cent GST is levied on full vehicles. Reduction in spare parts will result in a revenue neutral action for the makers.
• Reduction in custom duty on lithium ion cells which are mostly exported will also reduce the cost of production of vehicles.
• Other incentives like accelerated depreciation benefits: This should be provided for investments towards EV charging infrastructure or on utilisation of renewable energy, to boost further adoption, as was done initially for adoption of renewable energy a decade ago.

FAME incentives

This budget should increase the allocation towards MHI and the incentives provide under the FAME – II policy. Some immediate rectifications that would boost the sales of EVs include:

• Inflation costs: Increase the incentive from Rs 1.5 lakhs to meet the costs of inflation.
• Retrofit vehicles: Allow ICE retrofitment vehicles to be eligible for FAME incentives
• Bolster swapping infrastructure: Permit FAME incentives for vehicles being sold without batteries and provide further subsidies for such vehicles, in light of the 18 per cent GST currently being levied on spare parts.
• Batteries production: Provide incentives for local production of lithium ion cells and allocate funds for R&D development of alternatives for production of batteries (like aluminium air batteries). The localisation of manufacturing of the ACC cells is a step in the right direction – especially with recent PLI scheme which attracted participation from inter alia Reliance, Ola Electric and Mahindra.

Charging Infrastructure

A key deterrent in wide adoption of EVs in India is ‘charge anxiety’ and a robust charging infrastructure is the only solution to it. Currently the charging infrastructure is a fractured segment with private players trying to build their own private networks which has not penetrated beyond tier 1 cities and only fractionally in tier 1 cities, like the Ather network. This may be enable by:

• Increase allocation for PPP projects: Ministry of Power recently announced revised guidelines for Charging Infrastructure on January 14, 2022 (which has superseded the earlier regulations issued in 2019). It has provided lofty ambitions of roll out of EV infrastructure in mega cities as a national priority – and provides for inter alia bid of setting up charging infrastructure in highways through a nodal agency. The budget should allocate appropriate funds for it.
• Change in municipals laws and single window clearance: The government should mandatorily direct state governments to amend municipal and city laws to provide for setting up of charging stations in residential and commercial cities. Further, the states should adopt a single window clearance for setting up such charging infrastructure.
• Technical uniformity: The government should effectuate uniform standards in production of batteries to enable standardisation and wider reach of charging networks and reduce dependencies on brand based singular networks.

Financing and Priority Lending

One of the biggest issues that the sector faces is bankability of the EV sector, and this curtails production of electric vehicles and affects the chances of a sustainable ecosystem. Classifying EV sector as priority lending will enable:

• Ultimate customers: Boost in vehicle financing as there are concerns relating to resale as the shelf life of batteries is still an untested paradigm.
• Manufacturers and OEMs: Enabling raise construction financing and address concerns of bankability because of a lack of established stream of receivables.

Other Incentives to expand the EV ecosystem

• PLI Scheme: While the PLI scheme for automobile and auto componenent industry issued on September 23, 2021 is a step in the right direction, the threshold value for eligibility should be reduced to remove barriers of entry for start ups or other small OEM enterprises.
• Scrappage policy: Allocate funds to bolster the step in right direction taken in the 2021 budget by introduction of the scrappage policy. Special focus should be on building the reverse infrastructure and provide for accountability of states to implement the green tax.
• Penetration of electricty and boost in economy: The latest trend have shown that the largest consumers of EV two- wheelers in the last year was in the tier 2 and tier 3 cities (along with shared mobility). Ensuring continuous electricity and improvement of the faulty grid infrastructure is imperative and adequate budget should be allocated for it.

In 2021- 2022, with leading industry players showing tangible interest in the EV industry such as Adani indicating its interest in foraying into EV, Tata Motors raising a 1 billion dollar investment, Mahindra launching 16 models of EV by 2027, Ola Electric unfurling its flagship vehicle, the 2022 budget can provide the booster required to make India’s green transport revolution a reality.

(Santosh Janakiram is the Head-Project and Partner and Lakshmi Prakash is Partner at Cyril Amarchand Mangaldas.)