Clarifications Issued by the Indian Government on New EV Policy Implementation

Posted by Written by Abhishek Dey and Melissa Cyrill Reading Time: 6 minutes

The government has clarified how India’s new EV Policy will work as it seeks to tie-in subsidy/benefits to local investment and domestic value addition (DVA).

On March 15, the Indian government approved a new US$500-million-worth Electric Vehicle (EV) Policy, offering range of incentives with the intention of drawing investments from global EV companies and positioning India as a prime manufacturing hub for state-of-the-art EVs.

Other objectives include providing Indian consumers with access to cutting-edge EV models, expanding the Make in India ecosystem, lowering costs of production, reducing oil import, reducing air pollution in urban areas, and fostering a competitive domestic auto manufacturing industry.

A little over a month later, clarifications on how the new EV policy will operate have been released as Vietnam auto manufacturer VinFast appeared to have misunderstood details of the policy roll-out.

READ: EV Sector in India: Production Capacity, Government Targets, and Market Performance

What’s in India’s new EV Policy?

India’s new EV Policy’s entails the following eligibility criteria and incentives on offer:

  • Minimum investment of INR 41.5 billion ( US$500 million) required, with no maximum limit on investment.
  • Manufacturing timeline set at three years to establish facilities and commence commercial production of EVs, with a mandatory target of achieving 25 percent domestic value addition (DVA) by the third year and 50 percent DVA by the fifth year.
  • Customs duty of 15 percent (as applicable to CKD units) with a minimum cost, insurance and freight (CIF) value of US$35,000 and above, for a five-year period, contingent upon setting up manufacturing facilities within three years.
  • The duty foregone on the total number of EV allowed for import would be limited to the investment made or INR 64.84 billion, whichever is lower. A maximum import limit of 40,000 EVs at the rate of not more than 8,000 per year will be permissible for investments of US$800 million or more. The carryover of unutilized annual import limits, however, will be permitted.
  • Investment commitments must be backed by a bank guarantee, which will be invoked in case of non-compliance with DVA and minimum investment criteria.

In keeping with the new EV Policy, the Central Board of Indirect Taxes and Customs (CBIC) issued two notifications dated March 15: 19/2024-Customs and 20/2024-Customs that exempt social welfare surcharge and reduce the basic customs duty (BCD) to 15 percent for EV imports falling under heading 8703 of the Customs Tariff subject to certain conditions.

Clarifications issued by the government to VinFast

  1. Investment requirement: The policy mandates that a company must invest US$500 million within the first three years of operation. This investment should result in vehicles rolling out of the plant with a 25 percent DVA.

  2. Timeline for investment counting: Investments made in a new plant, such as the one in Thoothukudi, are counted only after 240 days from the start of construction. The initial 120 days constitute the application window, followed by another 120 days for evaluation and confirmation by the Ministry. After receiving confirmation, the investment cycle begins, meaning the actual investment recognition starts only after eight months.

  3. Consequences of non-compliance: If the US$500 million investment is not completed within the specified three-year period, the company will not be eligible for the bank guarantee mentioned in the policy.

Following the clarification of these details to VinFast, concerns have arisen that the company may postpone its operations in India and temporarily suspend its Tamil Nadu plant construction.

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What India hopes to achieve with this policy

India’s domestic EV preferences will pick up in time and in the meantime, policies such as the PLI Schemes and localization compliance targets will enable the country’s automotive factories to secure more FDI, modernize, innovate, scale up, and tap into high value export markets. Rohit Kapur, Managing Director, Dezan Shira & Associates India

The EV Policy offering is in line with India’s ambitious goal of targeting 30 percent of new vehicle sales to be electric by 2030. Despite electric cars representing only 1.3 percent of total car sales in 2022, the Indian government is keen to push for EV production.

For a long time now, India has sought to attract investments from leading automotive companies like Tesla to establish their presence in India and anchor the high-tech development of the industry’s domestic ecosystem. Given the slowdown in the EV market in other key regions such as the United States and Europe, and geopolitical tensions around China, India offers an attractive base for global firms to expand their operations and diversify their market reach.

The new EV Policy seeks to convince reluctant or undecided global car manufacturers into entering the Indian market. Tesla is facing challenges due to its lack of entry-level vehicles and aging product lineup, leading to declining demand and increased competition from rivals like China’s BYD.

In fact, Vietnam’s VinFast was ambitious about its US$2 billion India investment plan hoping to secure key benefits under the new EV policy. It had initiated the construction of a factory in Tamil Nadu in March and requested the Indian government for lowering component import tariffs. In a public statement on March 18, VinFast India CEO Pham Sanh Chau had commented that “This forward-looking policy will help us introduce a wide variety of smart, green, premium-quality SUVs at inclusive prices, along with outstanding after-sales policies.” It now appears that the Vietnamese firm may have misunderstood just when it could start becoming eligible for benefits.

Timing of India’s EV ambition

From an environmental perspective, India ranks as one of the most polluted countries in the world; Delhi is the world’s most polluted capital and the Indian cities of Beguserai and Guwahati are ranked as the two most polluted cities in the world, per the latest report from Swiss-based IQAir. Transitioning more public transport and personal vehicles into using EV technology should have a tangible impact on the PM2.5 levels in urban areas.

Further, as the auto industry is compelled to meet strengthening local and global green compliance standards and export markets for EVs begin to grow at a faster pace than ICE vehicles, enabling industrial policies will be essential for India’s auto manufacturing landscape to upgrade existing factory capacities and innovate electric and new-energy models.

Concerns expressed by industry stakeholders

The new EV Policy has raised concerns among auto companies about fairness in India’s automotive industry. They worry that special import duty rates, offered only to new entrants, may disadvantage existing players. Luxury auto giants like BMW, Volkswagen, and Mercedes-Benz are also deliberating their stance on the issue – instead of tapping into lower tariffs, they may consider directly investing in local assembly capacity.

Meanwhile, S.Korean companies like Hyundai and Kia, along with some Indian manufacturers, advocate for recognizing their early / cumulative investments in the EV space when issuing approvals for lower tariff imports.

Even VinFast, which is building a factory in Tamil Nadu appears to be confused by the EV policy terms and eligibility for incentives. Per a report in the Business Line on April 22, concerns over when benefits/subsidy under this new EV policy start accruing has cast a shadow over the Vietnam auto firms Tamil Nadu project. Any benefit or subsidy sought will be applicable only when the policy is in place and not when the OEM starts investing. So, in the case of VinFast, the policy will apply after 240 days from the day of the construction of the Thoothukudi plant – first 120 days are the application window followed by a 120-day period required by the Ministry of Heavy Industries (MHI) to evaluate the proposal and confirm. The investment cycle can begin only after the MHI’s confirmation letter.

An official speaking to the paper further clarified: “…VinFast had a misconception that it can invest US$500 million by the fifth year. But the policy clearly mentions that you have to invest that by the third year. In the third year, you should have completed your US$500 million investment and the vehicles should roll out of the plant with 25 percent DVA.”

Domestic industry players are also worried about an influx of Chinese car firms who are among global market leaders. This is more so as Chinese auto imports to Western markets like the EU and US have slowed down due to anti-subsidy investigations. And, India already imports US$20.3 billion worth of auto components, 30 percent of which comes from China. To assuage these concerns, the new EV Policy has put in import quotas for the lower tariff and linked its access to time-bound local investments.

A situation could materialize in future, per a GTRI report, where several Chinese firms enter into JV partnerships with Indian automakers. Most recently, the JSW Group and other investors, including financial investors and MG Motor dealers and employees are set to invest INR 50 billion (US$600.05 million) (US$1=INR 83.33) for a 51 percent stake in JSW MG Motor India with the remaining 49 percent to be held by China’s state-owned SAIC Motor.

Other support schemes

Various other policies have been implemented by both the Central and state governments to promote the adoption of EVs and strengthen India’s manufacturing sector. The Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME India) Scheme, initiated in 2015 and currently in its Phase II, aims to reduce vehicular emissions and promote consumer purchase. Additionally, the state governments of Tamil Nadu, Telangana, Gujarat, Maharashtra, Haryana, Rajasthan, Chhattisgarh, Odisha, and more have devised their own separate EV policies to bolster the purchase and local production of electric vehicles.

Furthermore, the Production Linked Incentive (PLI) Scheme for the automotive sector, launched in September 2021 with a budget of US$3.1 billion, aims to boost domestic production of advanced automotive technology (AAT) products. Another PLI Scheme, targeting the National Program on Advanced Chemistry Cell (ACC) Battery Storage, was also launched in 2021 with a budget of US$2.1 billion over seven years to enhance ACC battery production capabilities in India.

These collective initiatives aim to accelerate EV adoption and enhance the country’s manufacturing landscape.

Read: PLI Scheme for India’s Automotive Sector Amended and Extended by One Year

This article was originally published March 22, 2024. It was last updated April 25, 2024.

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