Tesla's duty cut demand reopens debate between domestic and foreign players

Elon Musk rarely stays out of controversy in whatever market he operates. But the latest one, a request for a duty cut on Tesla’s iconic electric vehicle (EV), has revealed an old fissure between automakers in India, with home-grown manufacturers on one side and global manufacturers on the other. The two have been split on the matter for several years. The only thing that has changed is the context. Triggered by Tesla lobbying with the Indian government for an import duty cut, the debate now centres on EVs. Earlier, the arguments were over a duty cut on internal combustion engine or ICE-powered cars.

India levies an import duty of 100 per cent on imported cars if the CIF (cost, insurance and freight) value exceeds $40,000 or has a petrol or diesel engine with a displacement of greater than 3,000 cc and 2,500 cc, respectively. For cars that have a CIF value of less than $40,000, the duty is 60 per cent. Tesla’s EV, which the company plans to start selling in India from this year, will have a CIF exceeding $40,000 and will, therefore, attract a 100 per cent duty. But the Elon Musk-founded firm is seeking a duty cut of 60 per cent for this category.

Unsurprisingly, Indian manufacturers are not in favour of such a sharp cut; they believe that a duty cut will be in contravention of the thrust on make-in-India and affordable EVs through the Faster Adoption and Manufacturing of Electric Vehicles or FAME II incentive scheme.

“The Indian government, through FAME II eligibility criteria, has set the right direction for the country to accelerate the adoption of EVs. The eligibility criteria has always emphasised affordable EVs and localisation as per the Phased Manufacturing Plan (PMP). We are sure the government will remain consistent to the philosophy and principles of FAME II,” P B Balaji, chief financial officer, Tata Motors, told reporters last week during post-earnings call.

Tata Motors’ anxiety on the issue is understandable. The company has an aggressive plan to tap India’s nascent EV market. It currently sells the e-Nexon in the personal mobility segment and targets a fourth of its total passenger vehicles sales coming from EVs in the foreseeable future. As part of the larger strategy, the Mumbai-headquartered firm will introduce 10 e-cars before 2025.

But Tesla’s call for an import duty cut has added heft to the demand of the local arms of global luxury carmakers who have been lobbying for a lower duty on imported cars. They are, therefore, endorsing Musk’s proposal.

“A duty cut on imported e-cars will propel demand and have a trickle-down effect even on the mass market segment,” said Santosh Iyer, vice-president - sales and marketing at luxury car market leader, Mercedes. According to Iyer, for a market like India that is at a nascent stage in its EV evolution with underdeveloped charging infrastructure, a cut will help manufacturers test market before going ahead and committing investments to localisation.

He said the FAME II scheme and other policy measures such as a lower 5 per cent GST on EVs and exemption of road tax and registration charges have helped lower e-car prices. But the price point is still high. A cut will help pass on the benefit to buyers. Iyer says this for a reason. The Mercedes EQC costs Rs 1.11 crore on-road in Delhi, while Audi e-tron costs Rs 1.25 crore. Even MG Motors’ ZVS and Hyundai Kona, the EV offerings from MG Motor India and Hyundai, have found only a few takers owing to their very high sticker price.

Balbir Singh Dhillon, head - Audi India, echoed a view similar to Iyer’s at the virtual launch of the company’s maiden EV offering, e-tron, last month. “While a lower GST on EVs and exemptions help, a duty cut will help further,” said Dhillon. Audi eyes 15 per cent of its total sales coming from EVs by 2025.

Pawan Goenka, who recently superannuated from Mahindra and Mahindra and now heads the Steering Committee for Advancing Local Value-Add and Exports, a joint government-industry panel tasked with fast-tracking the growth of the Indian manufacturing sector, suggests a middle ground. “Tesla wants import duty reduction. I think the government should consider lowering the 100 per cent slab to 60 per cent for EVs,” he said in a tweet last week.

Analysts also believe an import duty cut on EVs will spur growth and help create a market for high-end vehicles. “This is a good opportunity for India to open its market. The companies here don’t have to compete amongst themselves but also with other countries,” said Puneet Gupta, associate director at IHS Markit, a sales forecasting and market research firm.

The average middle class Indian aspires for such models and tends to benchmark the mass market purchase with the best, hence a lower duty will help companies seed the market, says Gupta. Moreover, it will pave the way for luxury car makers in India who have seen sales being stuck in neutral gear since the last decade, to introduce more e-cars.