Union road minister Nitin Gadkari has made a strong pitch to cut goods and services tax on ethanol-powered cars, pitching 2-3% lower tax than gasoline-powered vehicles for flex fuel cars, and 13-14% lower tax for flex fuel hybrids to compensate for their higher manufacturing costs. For a flex fuel hybrid with ex-factory price of ₹9 lakh, this can bring down the price by ₹2.80 lakh, similar to a petrol-run vehicle, Gadkari's calculations showed. Currently, hybrid cars attract GST of 28%.

In a 10-page letter to finance minister Nirmala Sitharaman in October seen by Mint, the minister said flex fuel hybrids that use 100% ethanol as fuel pollute even less than battery EVs. Gadkari's letter compares battery EVs and ethanol hybrids on 'well-to-wheel' emissions, or the total emissions from extracting fuel to using it in a vehicle. This is in contrast to tailpipe emissions, where EVs score ahead of others.

Though flex fuel vehicles aren't mass-produced in India yet, Toyota recently debuted a100% ethanol hybrid version of its Innova. Maruti Suzuki too has been working on flex fuel engines. Meanwhile, the recent interest in hybrids has prompted analysts to raise their target price on Maruti Suzuki, which is seen to be in pole position to reap the benefit of a change.

The push for flex fuel

Hybrids such as the Toyota Hyryder and the Honda City e:HEV sport a regular petrol engine, plus an EV battery and motor. Gadkari's tax proposal is to lower the tax on purely ethanol-fired vehicles (flex fuel vehicles or FFVs), as well as hybrids which use ethanol (flex fuel strong hybrid electric vehicles or FFV-SHEVs).

"While India continues to invest in and manufacture highly competitive internal combustion engine (ICE) technologies and pursue electrification of transportation, it need not choose between these two excellent energy pathways –and can leverage both through the FFV-SHEV technology. FFV-SHEV are the perfect examples of ICE and EV-based automobiles co-existing, co-creating and learning from each other", the letter said. These will also help reduce India's oil import bill, it added.

Also read: Can hybrid cars help you save more than the EVs?

India aims to have 20% ethanol-blended petrol at all fuel pumps by 2025, saving an estimated ₹30,000 crore in oil imports and reducing 10 million metric tons in greenhouse gas emissions.

Flex fuel hybrids pollute even less than battery EVs, the letter said, comparing lifetime emissions. These will also help reduce India's oil import bill, said the letter, a copy of which was seen by Mint. Gadkari said this should effectively lead to a "merit-based taxation system". 

Toyota Kirloskar Motor and Maruti Suzuki, both hybrid tech pioneers, have advocated a multi-technology pathway to lower vehicular emissions, whereas competitors like Tata Motors and Mahindra & Mahindra, as well as South Korea's Hyundai and Kia, have argued against incentivizing technologies other than battery EVs, which have zero tailpipe emissions. The latter group has taken the view that these 'intermediate' technologies which only increase fuel efficiency and comply with emission reduction norms shouldn't receive additional benefits, as it can hamper investments in EVs.

In April, Gadkari had mentioned that he had suggested lower taxes on hybrids, which was seen as a positive for Maruti Suzuki and Toyota Kirloskar Motor. However, the minister's letter makes a case for a 'favourable incentive framework', adding OEMs with lesser emissions can effectively earn carbon credits.

Flex fuel route to self-reliance 

To be sure, Gadkari has backed ethanol-based flex fuels for long, extolling its benefits in reducing India's oil import bill, enabling farmers to become energy producers and boosting the agrarian economy. In his letter, Gadkari points out while substituting ethanol will propel the country towards energy self-reliance and promote a circular economy by making use of plant residue (parali, which farmers in North India burn, and which contributes to air pollution). In August 2023, Gadkari had launched a Toyota Innova Hycross flex-fuel hybrid prototype which can run on 100%-ethanol.

Also read: Why the hybrid boom is funding EVs

"Strong hybrid allows us to do any of the electrified technologies in the shortest period of time, because it already has a full electric powertrain", said Vikram Gulati, country head, Toyota Kirloskar Motor. "If there's a consumer out there who has a choice of much more fuel-efficient technologies, which have implications for the society as these vehicles will be around for the next 15 years, the government and industry should be enabled to make that choice. Hybrids can give 40-50% higher fuel efficiency compared to gasoline engines", Gulati added.

"We urge the government to look at taxation in absolute rupee terms, which, if it is at par with IC-engines, will be revenue neutral for the government, but it will help greater offtake of electrify vehicles, without any revenue loss to the government. Worldwide year-on-year growth for hybrid vehicles in US, Europe and China have seen very high growth at par with EVs", he said.

Recently, broking firm JM Financial raised its price target for Maruti Suzuki, stating the company will be a key beneficiary of the customer preference for hybrids. "The company had a foresight back then (when it launched CNG) and we believe its current tech-agnostic approach is again a well thought-out approach against committing resources to a single technology," JM Financial said.

Also read: Toyota stresses on incentivizing hybrids to drive EV adoption

'Viable intermediate option'

"Strong hybrids, particularly FFV-SHEV, are a viable intermediate option, approaching closer to zero emissions. These vehicles can bridge the gap while the country works towards a full transition to electric vehicles. Despite their potential, strong hybrid vehicles are subject to high taxes. Electric cars are charged with 5% GST, while hybrid vehicles are taxed at 28% for sub-4-metre and 43% for above-4-metre hybrid vehicles", Vikas Nimesh, senior research associate, power utility and electric mobility, Alliance for an Energy Efficient Economy (AEEE) said.

"The government should consider reducing the tax slabs, especially for FFV-SHEV, to encourage the widespread adoption of these vehicles, significantly reducing on-road emissions, contributing to cleaner air quality in cities, and decreasing dependency on petrol and diesel. Additionally, promoting the use of India-produced ethanol in these vehicles would further support the vision of Atmanirbhar Bharat, fostering self-reliance and economic independence", he added.

Automotive industry body Society of Indian Automobile Manufacturers (SIAM) in 2022 had urged Nitin Gadkari to consider lower tax rates for flex fuel vehicles to aid customer adoption. In December 2022, ahead of the Auto Expo in January 2023, all leading Indian and foreign two-wheeler manufacturers had displayed flex-fuel prototypes at a SIAM event.

"We are all working under the aegis of Siam with a roadmap for introducing flex fuel vehicles. By October-December 2023, we will all showcase tooled-up pilot of flex fuel two-wheelers. And by September - October 2024, we all will work towards mass production of at least one model of flex fuel two-wheeler per manufacturer," KN Radhakrishnan, CEO, TVS Motor Company and chairman of SIAM's two-wheeler council had said.

In the same event, Maruti Suzuki had showcased a flex-fuel vehicle too: A Wagon-R which could run on E20-E85 blended fuel.