Green GST: Align this tax levied on vehicles with India’s environmental imperatives

With the world’s fastest-growing major economy and an ever-expanding road network, the demand for personal mobility is higher than ever. Yet, while the GST burden will broadly reduce from 22 September, Indian car buyers in general still face one of the heaviest burdens in the world, making personal vehicles expensive.

As trade deals are negotiated and tariffs potentially lowered in line with global norms, the economics of vehicle ownership must remain competitive. If import duties are eased, the domestic industry will need a fair GST regime to stay viable and attractive, safeguarding both jobs and value addition within India. The case for reform beyond this year’s rate reductions, with climate goals in mind, is both consumer-centric and industry-focused: it will make cars more affordable, sustain market growth and reinforce India’s position in a globalizing automotive market.

Also Read: Modi’s GST 2.0 plan is much more than a Diwali gift: It’ll give India’s economy a structural upshift

Encourage the right technology at the right price: Lower GST rates create immediate benefits for buyers, but the true power of reform lies in incentivizing technological progress as well.

While the tax structure ensures the ‘right price,’ it should support the ‘right technology’ as well. The right price means keeping personal mobility within reach of Indian households, reflecting competition as well as cost structures fairly in the final price. This part has been addressed to an extent. The right technology, though, means incentivizing a spectrum of cleaner vehicles—spanning New Energy Vehicles (NEVs), plug-in hybrids, strong hybrids, range extender EVs (RE-EVs), flex-fuel models and other low-emission options. Right now, only EVs are in the lowest 5% rate slab.

Ideally, a clear signal should be sent to manufacturers and investors that policy will back sustainability, innovation and global competitiveness, not just immediate affordability. Historically, India’s vehicle taxes have leaned on simplistic categories based on size, length (sub-4 metre, above 4 metre), engine capacity and fuel type. These have outlived their utility, but remain part of the GST regime.

Also Read: CAFE puzzle: Tailpipes must not get to wag India’s car market

A future-ready GST would use a more sophisticated, emissions-linked hierarchy. The most favoured should be zero or near-zero emission vehicles, like electric cars and select NEVs. Next, plug-in hybrids, strong hybrids, RE-EVs, flex-fuel vehicles and other options that deliver a measurable reduction in tailpipe pollutants. Finally, pure petrol and diesel models should be in higher tax slabs. This approach would mirror best practices from advanced markets and match India’s environmental ambitions, urban health needs and industrial strategy.

Let’s integrate NEVs: While EVs deservedly benefit from a 5% GST rate, further tax reform should broaden its scope to include new technologies that contribute to India’s emission-reduction targets. Plug-in hybrids, strong hybrids and RE-EVs can serve as a crucial bridge for those unable to immediately transition to full electric. Flex-fuel and hydrogen-powered vehicles also offer promising pathways, especially as infrastructure and supply chains evolve.

Also Read: GST reform: Grab this chance to make it bold and beautiful

Let taxation guide consumer choices: As of now, with conventional vehicles to be made cheaper, the financial advantage of choosing a zero-emission car will shrink while hybrids have no special push. To reinforce the gap in total cost of ownership between regular and clean energy vehicles as well as accelerate clean mobility, GST on EVs could have been cut to zero.

Globally, automotive taxation is increasingly tied to environmental goals, offering emission-based rebates, differentiated taxes and tech incentives to promote cleaner travel. India’s goals—clean energy, reduced oil use and better air quality—make similar tax differentiation essential.

We also need automatic revision mechanisms by which GST bands should evolve as technologies improve and emissions fall. Additionally, such reforms should stay in effect for a minimum of 5-8 years, given the long gestation period for new technologies. A stable tax regime would ensure that manufacturers can commit to clean technology transitions without the risk of midstream policy reversals.

India’s automotive shift needs to align with contemporary global trends as well as the unique needs of its people in pursuit of prosperity, innovation and sustainability over the decades ahead.

The author is president and managing director, JSW MG Motor India.