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Tesla CEO Elon Musk May Not Get "Temporary Tariff Relief" on Electric Vehicles in India

Jul 28, 2021 11:09 AM 5 min read

There were two major Tesla-related developments in recent days.

One, the EV-maker released its Q2 numbers yesterday. It reported a record $1.14bn quarterly (GAAP) net income - the first time this figure exceeded $1bn for the company - and $10.21bn in automotive revenue (including $354m from sale of regulatory credits, which was to everyone’s joy 17% lower vs. The prior quarter). With improved margins and over 200,000 vehicles delivered, Tesla had exceeded expectations.

Closer home however, the company wasn't particularly as pleased as punch.

Last week, the company revealed it had written to GoI officials requesting import duties on fully-assembled electric cars to be reduced. On Saturday, CEO Elon Musk also tweeted that he was eager to launch Tesla cars in India ASAP "but import duties are  the highest in the world by far of any large country". (More on Tesla’s India launch here.)

And then yesterday, Moneycontrol reported that senior Government officials had “categorically ruled out any possibility [of] granting it any company-specific incentives”.

So what are these import duties on cars Mr. Musk is referring to? Are they really sky-high?

Income Sources of the Government

First, let’s brush up on the basics. How does the Union Government make money? Broadly speaking, GoI revenues can be classified under three headings: tax, non-tax and capital receipts.

Tax revenues can be direct (levied on individuals or entities) or indirect (levied when a certain transaction takes place). Examples include personal income tax, corporation tax, GST, excise duty and customs duty. Here’s (pdf) a detailed breakdown of tax revenue receipts for FY21.

Meanwhile, non-tax revenues are those derived from services offered by the Government or its entities. Examples include interest receipts on loans, RBI surpluses, PSU dividends, broadcasting fees, railway revenue, external grant assistance, police services etc. Here’s (pdf) a detailed breakdown of non-tax revenue receipts for FY21.

Capital receipts refer to incoming cash flows that can be debt or non-debt in nature. Essentially, they are loans taken by the Government from the public or borrowings from the Central Bank, international organisations or other countries. Here’s (pdf) the Receipt Budget for FY21.


Where Trade Meets the Taxman

Duties on imported goods form a small portion of tax revenues, which itself is one component of GoI revenues. However, for a crisis-struck economy that barely escaped recession, is toying with a high fiscal deficit and is wary of big-bang spending, every rupee counts.

Moreover, pulling the levers of import taxes is a major way the Government boosts local industries and engineers trends. For instance, basic duties on imported coal (economically important) can go as low as 1% while for tobacco products (a health hazard), they can be over 81%.


Coming Back to Tesla Cars...

This isn’t the first time Musk has decried India’s custom duties on cars. He cited the same back in 2016 (when bookings for the Tesla Model 3 had already commenced), two years later when the company was in discussions to build a local factory, and in 2019 when he tweeted that at existing tariff rates Tesla cars would be “unaffordable” for Indian consumers.

Does Musk have a point?

Let’s look at the latest numbers. Early last year, the Government raised import duties across the board for automobiles in a bid to encourage local manufacturing and assembly of components.

Presently, India imposes a 100% import duty on cars with cost, insurance and freight (CIF) value of more than $40,000. For imported cars with CIF lower than $40,000, the rate is 60%. Naturally, the rates for fully-assembled imports (i.e. Complete Built-Up or CBU in tax-speak) are much higher than the same for cars that are to be assembled in India (i.e. Completely Knocked Down or CKD).

What about Musk’s claim that India’s rates are higher than any other country’s? If you compare with other major economies, there is truth in this statement:

The high import duties in the EV segment seem counterintuitive when juxtaposed with the Government's broader agenda of becoming a renewable energy superpower. However, it might be pertinent to analyse them alongside the wider trend of rising trade protectionism.


Why Import Duties in India are So High

In 1990, on the eve of the liberalisation reforms, the weighted average tariff rate stood at 56.4%. By 2013, this had fallen to 6.24%. During the same period, the total exports to GDP ratio rose from a meagre 6.24% to 25.18% of GDP. But in FY20, this number fell to 18.1%.

Why? In recent years, policymakers have become adamant that India become an export powerhouse. At the same time, there are loud calls for economic self-reliance. And what happens when a polity rallies against imports whilst championing exports? Import substitution industrialisation - essentially, replacing foreign products with domestic ones by subsidising the latter and/or taxing the former at high rates.

This line of thinking has been codified since 2018, when then-FM Arun Jaitley said there would be “a calibrated departure from the underlying policy in the last two decades, wherein the trend largely was to reduce the customs duty". Over the past year, Atmanirbhar-ism has further energised this strand of economic thought.

FYI: Protectionism may be a bad word but that doesn’t mean it never works. Take mobile phones. Domestic production of handsets shot up from 60 million to 290 million units between FY15 and FY19. This was largely due to the spike in customs duty on mobile phone imports from 0% to 20% (2018), which encouraged Indian manufacturers to make in India.


But EVs Deserve Special Treatment, No?

NITI Aayog decreed lofty ambitions for India's EV future. 70% of all commercial cars, 30% of private cars, 40% of buses and 80% of two- and three-wheeler sales to be electric by 2030! These targets seem about as (un)tenable as India's solar energy goals (for context, only 167,041 EVs were sold in India in FY20 vis-a-vis the 100 million cumulative figure envisioned by the end of this decade). The revised goal of 30% EVs by decade-end seems more realistic.

Either way, the fact remains that India has a vested interest in a definitive EV pivot. For environmental, health, strategic and economic reasons.

This pivot would need a $180bn investment. And not all of it can come from state coffers. Which is why 100% FDI via the automatic route is allowed in this segment. An outlay of ₹10,000cr ($1.35bn) was approved for three years till 2022. ₹8,597cr ($1.16bn) was set aside for incentives and ₹1,000cr ($135.68m) for charging infrastructure. A PLI scheme for battery storage manufacturing has also been rolled out.

Even in the EV sector, there’s no escaping import substitution industrialisation. Ergo the recent spike in already-high EV custom duties. This was done to encourage foreign and domestic manufacturers to make in India. But on the flipside, it could disincentivise some investments.

Musk, for instance, has said a factory in India is likely “if Tesla is able to succeed with imported vehicles”. With the Government reportedly ruling out company-specific incentives, Musk may further delay Tesla’s long-awaited India launch.

In the meantime, one can only hope that the domestic EV industry - still relatively nascent - catches up with other countries and “import-substitutes” the economy to the future.


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