The GST miss: Why India should tax cars based on pollution, not size

This reform is expected to boost the auto industry. But policymakers could build on these changes by also linking GST vehicle emissions, thus leveraging India’s indirect tax regime not only to meet economic objectives, but also to advance India’s ambitious climate goals.

India’s transport sector is both an economic keystone and a significant and growing source of carbon emissions. In 2024, an average of 71,000 vehicles were registered daily in India.

Battery-operated electric vehicles (EVs), subject to 5% GST under both the previous and current regimes, accounted for only 7% of these registrations.

Amid enduring barriers to widespread EV uptake in India, including high upfront cost, consumer scepticism and a lack of adequate charging infrastructure, ICE vehicles will continue to make up a large share of new purchases for the foreseeable future.

As the government strives to accelerate EV adoption to reach net-zero emissions by 2070, considering carbon emissions alongside engine displacement and vehicle length in the determination of GST rates could help promote the uptake of cleaner vehicles.

Past ICCT research on passenger cars in India has found that cars with similar engine displacement have widely varying emissions. For instance, cars with engine displacement below 1200cc—a key threshold in the new GST rate structure—produce emissions varying between 85g/km and 149g/km.

Vehicle length is also found to be an inadequate indicator of carbon emissions. For example, emissions among cars with a vehicle length of not more than 4 metres—another key threshold—were found to vary between 85g/km and 161g/km.

These findings suggest that the new GST structure for cars misses an opportunity to promote clean mobility more directly by levying taxes commensurate with vehicle emissions.

An emissions-linked GST structure for vehicles could offer three key benefits for meeting India’s climate objectives.

First, studies by ICCT have found that vehicle taxation can serve as a key policy lever to influence the adoption of low-emission ICE technologies among consumers.

Countries such as France, Ireland, Germany, Singapore and Thailand have adopted vehicle tax structures linked to emissions. The records of these countries show that such policies can support the uptake of lower-emitting vehicles.

For example, after France adopted its emission-linked fee structure for passenger cars in 2008, the type-approved emissions of the new passenger car fleet decreased by 9g/km (about 6%), which was almost twice the reduction achieved in the rest of the EU.

Meanwhile, certain higher-emitting vehicles witnessed a decline in sales. In the Netherlands, carbon-based vehicle taxation led to a 6.3g/km emissions reduction between 2005 and 2012.

Second, an emission-linked tax structure can be designed such that the fee levied on high-emission vehicles can be used to offer rebates or subsidies for the purchase of low- and zero-emission vehicles.

Commonly known as a feebate (or bonus-malus) programme, such a system could help the government spur uptake of lower-emitting vehicles while reducing the fiscal burden of incentives on the exchequer.

In France, sales of lower-emission vehicles jumped by about 80% after a feebate system was introduced in 2008; thanks to careful policy design, France’s programme achieved a positive revenue balance from 2014 to 2022.

In Sweden, registrations of new EVs surged following the introduction of a bonus-malus scheme in 2018.

Third, since manufacturers have an economic interest in increasing sales and maximizing profit, an emissions-linked GST framework could also serve as a policy lever to nudge vehicle manufacturers to adopt low-emission technologies and improve the environmental performance of their vehicles.

As India strives to achieve net-zero emissions by 2070, supplementing the current GST structure—which is based on engine displacement and vehicle length—with an emissions-linked tax framework could make a difference.

The government has already taken a critical step towards differentiating vehicle taxes for stimulating the auto industry and promoting cleaner mobility.

With some adjustments, it could encourage consumers of ICE vehicles to opt for models with lower emissions and vehicle manufacturers to invest in technologies that are cleaner and more fuel-efficient.

The author is a researcher at the International Council on Clean Transportation (ICCT).