Subsidies may spark interest in EV batteries

The Ministry of Road Transport and Highways (MoRTH) is now allowing the sale and registration of electric vehicles (EV) without integral batteries. This benefits original equipment manufacturers (OEM), energy service providers and other stakeholders. This decision aligns with India’s aim to become an all-EV nation, substantially reducing vehicular pollution and oil import bills. It will preserve the environment, help climate change initiatives, reduce import costs and benefit the exchequer, and boost the EV sector. There are, however, legal issues and implications for incentives for EVs and batteries.

This is a progressive step as it enables the monetisation of battery swapping technology, brings down the purchase price of EVs and provides cost benefits for end-users. Consumers can install aftermarket batteries under lower cost models than when buying vehicles and batteries together. It raises, however, difficulties over the applicability of incentives approved by the Department of Heavy Industries (DHI), the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II) scheme and the Production Linked Incentive (PLI) scheme for the manufacture of advanced chemistry cells (ACC).

FAME-II provides demand incentives, a form of subsidy, to buyers and end-users in an upfront reduction in the purchase price of EVs, calculated on battery capacity, that is the energy content measured in KWh. FAME-II never contemplated the separate supply of EV hulls and batteries as the battery was the cornerstone of the scheme. This creates ambiguity over the applicability and calculation of demand incentives when batteries and hulls are sold separately.

Under FAME-II, to qualify for demand incentives hybrid and electric vehicles have to be covered by a comprehensive warranty for at least three years to include the battery from the manufacturer and should have access to adequate after-sales service for the life of the vehicle. The separate sale of hull and battery leads to further ambiguity, as EV OEMs may not be able to provide warranties or services for batteries purchased separately by end-users. This may lead to separate warranties and services for batteries and hulls, which may be inefficient and expensive. The government should allow flexibility in this matter. Stakeholder representatives have raised the issue with the DHI and MoRTH and await a response.

The PLI scheme offers production-linked subsidies for each KWh and percentage of added value on actual sales made by manufacturers who set up production units. At present, demand for ACCs is met through imports and the scheme aims to reduce dependence on such imports.

There will be problems with the application of the goods and services tax (GST). The government reduced the rate of GST on electrically operated vehicles from 12% to 5% in 2019. The purpose was to promote the adoption of EVs by incentivising different EV verticals. The MoRTH decision does not indicate whether an EV without an integral battery will still be classified as an electrically operated vehicle and whether, for any non-outright purchase structure, the 5% GST rate will apply. Ideally, it should. A response from the DHI and MoRTH is also awaited.

These problems are indicators of a fast-evolving and aggressive market with strong governmental backing. To keep up with the government’s intended pace of growth, the policies and rules regulating the sector need to adapt quickly. The legislature and various ministries involved must help catalyse the rapidly expanding EV market.

To resolve the difficulties, there should be incentives and subsidies for the purchase of batteries where hulls and batteries are sold separately, as the battery remains the most expensive component of an EV. This also aligns with the purpose of the FAME-II scheme, which is to bring down the overall cost of EVs. An immediate proactive approach is needed to enact the appropriate legislative framework. The government has constantly tried to improve policies and infrastructure for EVs. The aim is to put India on an equal level with other nations in green initiatives within the next three to four years. In the meantime, it is hoped that individual buyers will become the target market for EV battery manufacturers as the price of EVs falls.

Dipti Lavya Swain is a partner and Mishthi Seth is an associate at HSA Advocates.