On 11 January, the Union heavy industries ministry formed a panel of vehicle testing agencies, petroleum ministry officials and auto industry bodies to study whether hybrids should have lower compensation cess. The cess, levied on top of goods and services tax, depends on vehicle type, engine size and fuel. Generally, small cars attract a cess of 1-3%, while SUVs and luxury cars bear 15-22%. For hybrids, the cess for current models is 15%, taking the total tax levied on them to 43%. Battery EVs face 5% GST, and no cess.

Meanwhile, the industry is divided between companies such as Maruti Suzuki and Toyota Kirloskar Motor which favour lower cess for hybrids and flex-fuel vehicles, and Tata Motors and Mahindra and Mahindra want the benefits solely for EVs. EV makers have also resisted a proposal to lower GST on flex-fuel vehicles which can run on ethanol-blended fuel of up to 85%, a committee member said on condition of anonymity. Any attempt to lower hybrid taxes will confuse the industry, a Tata Motors executive said in January.

The tug-of-war over hybrid cess

"Even on flex fuels, the same companies who want rationalization on taxes for hybrids are the ones advocating for incentives for this technology; the rest aren't. The reason is, if companies are making investments on EVs, a sector which demands hefty capital for very low returns in the near future, they would want that technology to be promoted. If GST is lowered on both, there is high possibility that hybrids and flex fuel vehicles will sell more at the cost of EVs", said a top executive at an auto maker who is a member of committee.

The committee was formed after the commerce ministry's Department for Promotion of Industry and Internal Trade (DPIIT) sought the industry ministry's recommendations on the matter. Recently, transport minister Nitin Gadkari had said that a proposal to reduce GST on hybrid vehicles to 5% and 12% for flex engines has been sent to the finance ministry, which is considering the request.

The Society of Indian Automobile Manufacturers (SIAM), the country's apex auto industry body, has been unable to take a stand on the matter, with leading members on opposite extremes. Maruti Suzuki Grand Vitara, Toyota Innova Hycross and Honda City are some of the India-made vehicles that come with hybrid variants.

Also read: For hybrid car makers who wanted tax cuts, hopes are fading

Will EV tax sops continue?

Automakers also worry if EVs will continue to enjoy tax breaks as their market share reaches 5-10%, from the current 2%. 

Meanwhile, hybrid sales overshadowed electric cars in India in 2023 as more customers worry over EVs' range, Mint reported on 29 February. Worldwide too, hybrids have extended their lead over EVs, Wall Street Journal reported on 15 April. Mercedes-Benz, BMW, Ford, General Motors and Stellantis have reported robust growth in hybrid sales, driven by factors such as mineral supply chain challenges, inadequate charging infrastructure, and consumer affordability concerns.

"Concerns linger about whether EVs will continue to enjoy tax benefits at higher adoption levels, in terms of raising questions about their long-term viability in the Indian market given the global narrative at present, in which EVs have seen a slow phase of growth even with significant price cuts", a top executive at a leading automotive firm said, declining to be identified.

Graded tax for vehicles

Companies like Maruti Suzuki and Toyota Kirloskar Motor have advocated a "graded" tax policy, where vehicles are taxed in a manner proportionate to their emissions, which would mean technologies like CNG and hybrids attract taxes higher than those levied on EVs, but lower than fuel-burning vehicles.

"Despite EV price reductions, pace of electrification has slowed in the recent quarters. At the same time, strong hybrid sales are picking pace led by recent launches from MSIL and Toyota. Penetration of Strong Hybrid cars at 2.3% surpassed 2% for BEV cars during 4QCY23 owing to affordability issue and lack of adequate charging infra. On the other hand, despite unfavourable taxation, Hybrid cars offer better value with higher mileage and no charging hassle", a report by brokerage firm JM Financial said, adding that a potential reduction on taxes of hybrid vehicles to 12% can reduce the TCO (total cost of ownership) of a Strong Hybrid Grand Vitara (by Maruti Suzuki) by 13% and bring it at par with a long-range compact electric SUV.