The crude oil industry, refined petroleum fuels (and CNG) and the more than 75 million ICE vehicles registered in India are an enormous source of taxes for the Centre and the state governments. Reports suggest that for 2019-20, 13% of the Centre’s revenue came from the excise duty and cess on high-speed diesel (HSD) and motor spirit (petrol). Also, the VAT levied on petroleum products brought in an average of 15% of all the states’ and union territories’ total revenues in 2021.

Fig. 1: Share of fuel taxes in states’ total revenue (2019-20) | PPAC 2022 & RBI 2021

Another important source is road tax. India’s 5.89 million kilometers of roadways are the second largest network in the world and the road tax for ICE vehicles varies from 4% of the cost of the unit (if it sells for under Rs. 6 lakh) to as high as 20% for ones that cost in excess of Rs. 20 lakhs. Even with 2021-22 being a slow year for automobile sales, India registered over 1.5 million vehicles and 99% of them were IC-engined.

Clearly then, losing these vast amounts of fuel tax revenue every year would be a daunting prospect. For example, Delhi’s EV transition by 2030 will lead to a 10.2% reduction in FTR for the Delhi government, which would in turn translate to a 10% loss of revenue from fuel taxes to the Government of India.

With the number of EVs in India expected to hit 1.6 million units by 2025 and 15 million by 2030, it is possible that a section of this revenue may not be recovered in the short-term as EVs do not consume fossil fuels, they are so far exempted from road taxes and registration fees, and at the moment the GST on them stands at 5%, versus 18% - 28% for ICEVs.

However, it’s not all doom and gloom for the exchequer.

Losses versus benefits from transport electrification 

The Council on Energy, Environment and Water (CEEW) estimated in 2022 that by 2030, India could save over Rs. 1,07,566 crores (USD 14.1 billion) annually if the Centre’s 30% EVs target by 2030 was to come true. Yet at the same time, this would result in a total value-added loss of nearly Rs. 2 trillion (USD 25 billion) for the crude oil and the automotive sectors — again, every year. Additionally, Rs. 1 trillion in taxes would be lost from the reduced sale of petrol and diesel fuel.

The bright side is that the growing market share of EVs would:

• Massively expand the demand for li-ion battery packs, charging infrastructure and the powertrain elements for the vehicles to more than Rs. 2,12,456 crores ($27.8 billion).
• Add around 120,000 new jobs for these segments alone.
• Create several thousand jobs in EV manufacturing, allied electronics, telecommunication equipment and battery recycling.

Even more importantly, CEEW’s analysis predicts that with the 30% target for EV penetration, there would be a 17% drop in particulate matter and NOx emissions, a 4% drop in greenhouse gas emissions and an 18% reduction in carbon monoxide (CO) emissions. These are significant achievements and although the corresponding benefits to public health are not easily quantified, it would show that the lost tax revenue from the ICE vehicle economy translates into far-reaching public benefits.

Fig 2: E-mobility transition will have massive health benefits and help save associated health costs © pollutionnest.in

It’s important to note here that while there are apprehensions of a net loss in jobs with the switch to e-mobility — as high as a 25% loss — the inevitable electrification of shared mobility (metro rail, buses, taxis, autorickshaws) will continue to attract public and private investments, besides generating jobs across their value chains.

Taxing EVs to recoup losses

Several studies have already examined the ways to recover the losses from a switch to EVs. After all, they too will use city roads, highways and toll bridges over their service life, which need regular maintenance and repair. Following are some ways in which many regions globally are recovering taxes in this transition to e-mobility.

1. Annual flat tax on EVs: This would be to recover the losses from selling petrol, diesel and CNG. However, not everyone would drive their EVs the same distance, so this is not an equitable solution.
2. Increasing existing taxes on petrol, diesel & CNG: The idea would be to make them more expensive and pass on the cost to the customer. Yet, with the majority of goods transport vehicles running on these fuels to carry food and essential supplies to all corners of India, any increase in taxes would be a highly sensitive, political issue.
3. Increasing GST on EVs: The idea is to tax both EVs and the ICEVs at 28% GST, but this would not only raise the upfront cost of EVs, but also lead to:

• Higher purchase prices for even the most modest of EV users (from low income backgrounds)
• Unduly target EV owners who do not drive anywhere near as much as commercial and/or daily drivers
• Make e2Ws and e3Ws instantly more expensive, when the two categories are spearheading India’s EV transition; it would also affect their costs of ownership and last-mile delivery economics

4. Taxing electricity more: This too was found to be not a good solution as research has found that the recovery of revenue lags far behind the revenue lost. For Delhi specifically, CEEW’s research showed that the electricity would have to be taxed at 150% more to cover the losses. The electricity meant for EVs will also be used by metro rail, electric buses, taxis, autos and rickshaws, so an equitable distribution of the cost between such customers and private EV owners (some with home chargers) is fraught with difficulties.

5. Distance/mileage-based tax: This solution would tax EV users based on the kilometres/miles they drove over the life of the vehicle. Essentially, the tax is calculated per unit of distance travelled and it is found to be the most equitable solution for the simple fact that it keeps the other prices/regulations untouched and only recovers the revenue for the actual distance travelled. However, it does lead to higher total cost of ownership (TCO) and requires mandatory reporting of the kilometres travelled by an EV owner, which opens up avenues for tampering with odometer readings, as well raising privacy concerns if the vehicles are tracked via GPS. Australia (Victoria and New South Wales) and a couple of states in the US (Virginia, Utah) have been testing this alternative, and for India, the estimated loss recovery is expected to cover the fuel tax revenue lost.

What could be the best scenario?

CEEW analyses the potential of each solution for tax recovery, as well as their impact on disputing India’s pace of e-mobility. Levying annual flat taxes on EVs, increasing existing fuel tax rates and distance taxes have the highest potential for recovering revenue.

However, from the perspective of ensuring least disruption to the EV transition, increasing fuel taxes and distance tax are the best options, as these do not significantly impact the total cost of ownership of EVs, which is a critical factor in their adoption, particularly in India.

Taxing EVs per kilometre can be designed well to minimise the impact on EV costs while maintaining revenue levels and simultaneously sending policy signals. It will need to be introduced slowly to ensure that the inevitable withdrawal of EV subsidies does not coincide with the new tax. There has been no word yet by the Centre on if and when the next iteration of the FAME scheme will be introduced, and beyond 2030 it’s very likely that subsidies will be withdrawn for all but the very lowest income-category of EV buyers. By timing it well, road taxes and registration fees may also be introduced.

Moreover, the population density across India varies greatly so it’s recommended that the states receive a degree of autonomy in the matter. The roads and highways in the far north and east of the country (Ladakh, Himachal Pradesh, Arunachal Pradesh, Mizoram etc.) likely do not have to withstand the same degree of wear and tear as in Delhi NCR, Mumbai, Kolkata, Chennai, so the authorities must devise the tax accordingly. Doing so would simultaneously address the inequalities in incomes amongst these states.

Overall, the transition to e-mobility — and the correlated push for clean energy — will bring in several societal benefits by 2050. In the interim though, the Centre and the states must be prudent and sensitive in recovering fuel tax revenue as EVs are yet to garner any meaningful market shares without the help of subsidies.