After Tesla Proposal, Government Considers Import Tax Cut for Automakers That Manufacture in India

India is working on a new electric vehicle policy that would slash import taxes for automakers that commit to some local manufacturing, following a proposal by Tesla which is considering entering the domestic market, people with direct knowledge said.

The policy being considered could allow automakers to import fully-built EVs into India at a reduced tax as low as 15 percent, compared to the current 100 percent that applies to cars which cost above $40,000 (nearly Rs. 33 lakh) and 70 percent for the rest, said two of the sources, including a senior Indian government official.

Tesla's best-selling Model Y, for example, starts at $47,740 (nearly Rs. 39 lakh) in the US before tax credits.

"There is an understanding with Tesla's proposal and government is showing interest," said the official, who is familiar with the issue.

If such a policy is adopted, it could amount to a drastic reduction in the cost of imported EVs that local carmakers have been keen to avoid. It could also open the door for global automakers, beyond Tesla, to tap the world's third-largest car market where sales of EVs are less than 2 percent of total car sales, but growing rapidly.

The lower import taxes could help Tesla sell its full range of models in India, and not just the new car it wants to make locally, said a third source.

Other countries have taken similar measures to spur EV manufacturing commitments. Indonesia, for example, has offered to reduce import duties from 50 percent to zero for EV makers planning investments, a move seen aimed at attracting Chinese players and Tesla.

India's commerce and finance ministries, and Tesla, did not respond to requests for comment. The policy is still in the initial stages of deliberation and the final tax rate could change, two of the sources said.

Tesla first tried to enter India in 2021 by pushing officials to lower the 100 percent import tax for EVs. Last year, the talks between Tesla and the Indian government collapsed when officials conveyed the company would have to first commit to local manufacturing.

More recently, Tesla has told Indian officials it is keen to set up a local factory and make a new EV priced in the range of $24,000 (nearly Rs. 20 lakh), around 25 percent cheaper than its current entry model, for both the Indian market and export.

"Lot of deliberations"

Outside the United States, Tesla currently has a plant in Shanghai — its largest factory worldwide — and one outside Berlin. It is building a new plant in Mexico that will focus on a new mass-market EV platform Musk has said will slash costs for consumers.

For India plans, Tesla's senior public policy and business development executive Rohan Patel has in recent weeks met top officials privately. Prime Minister Narendra Modi, who held talks with CEO Elon Musk in June, has been tracking progress closely, Reuters has reported.

One of the sources said Tesla told Indian officials a potential India factory could operate at full capacity by 2030.

Indian officials have conveyed there will be no special incentives for Tesla's market entry, and the proposal for a low import tax, conditional on a manufacturing commitment, was touted by Tesla to keep both sides happy, the sources said.

Still, New Delhi is going to move slowly in considering the policy proposal as any lowering of taxes on imported EVs could disrupt the market and upset local players like Tata Motors and Mahindra and Mahindra that are investing to build electric cars at home.

"This is going to go through a lot of deliberations even though government is keen on getting Tesla. That's because of the impact on domestic players," the Indian official said.

© Thomson Reuters 2023