How Tax Reform Is Shaping Sustainable Mobility in India

As India accelerates towards a greener transport future, the overhaul of its tax structure has become a key policy lever shaping the economics of sustainable mobility. 

India’s tax regimes have consistently shaped consumer purchasing decisions and market dynamics in all sectors, and the automotive sector is no exception. In the 1990s, the combined incidence of customs duty, excise, and sales tax often exceeded 60% of a car’s base price, suppressing affordability and slowing ownership growth. Policy recalibration in the 2008 Budget, when excise duty on small cars and two-wheelers was reduced from 16% to 12%, immediately stimulated demand in the most price-sensitive segments, signalling the state’s use of tax relief as a demand-shaping instrument.  

On the supply side, the Automotive Mission Plan 2006-2016 emphasised excise concessions for small vehicles and lower duties on raw materials (from ~7.5%) to catalyse localisation of components and attract global Original Equipment Manufacture (OEM) investment. These measures triggered a wave of compact car launches, greater reliance on domestic suppliers, and sharper competition on price points.

In the 1990s, the combined incidence of customs duty, excise, and sales tax often exceeded 60% of a car’s base price, suppressing affordability and slowing ownership growth.

At the dealer level, anticipation of tax relief often led to inventory build-ups or delayed retail sales, underscoring how fiscal signals influence channel behaviour as much as consumer demand. In essence, India’s tax and duty instruments have not only generated revenue but have been market-shaping tools, determining what vehicles consumers buy, how manufacturers design and localise, and how quickly new entrants expand. 

It isn’t a question of being ‘beyond’ a tax system, rather, it is a matter of informing our perspectives on what a comprehensive tax-system truly entails. Tax systems are multidimensional policy instruments that innately shape supply-chains, consumer demand as well as sustainability transitions. Even before the 2025 tax reforms, India’s Goods and Services Tax (GST) served as more than a fiscal instrument – it acted as a policy lever to influence demand, supply, and investment in sustainable mobility. 

On the demand side, GST differentiation encouraged cleaner vehicle choices. Since July 2019, electric vehicles were taxed at just 5%, compared to 28% plus cess for petrol and diesel cars. This sevenfold gap made EVs more competitive and spurred early adoption, especially in the price-sensitive two- and three- wheeler markets. After the rate cut, electric two-wheeler sales jumped from about 130,000 in FY2020 to over 720,000 in FY2023, even before large-scale subsidies under FAME-II took hold. Similarly, charging infrastructure benefited from a 5% GST rate, reducing capital costs for operators. The nationwide GST system also enabled better policy monitoring by providing granular consumption and tax data. This allowed the government to identify EV adoption clusters, estimate fiscal costs, and calibrate incentives – insights that were impossible under India’s earlier fragmented tax regime. 

The 2025 GST reforms built on these lessons, shifting from encouragement to system-wide optimisation. By cutting GST on small cars to 18%, maintaining 5% on EVs, and eliminating inverted duty structures, the new framework aligns affordability with industrial incentives. It also complements schemes like PM E-DRIVE and PLI-ACC, linking fiscal policy with manufacturing and infrastructure expansion. 

In essence, GST has evolved from a tax collection system into an industrial and behavioural policy tool one that can both steer consumer choice and shape the contours of India’s clean mobility transition. 

Much like earlier tax interventions that boosted electrification, or nudged localisation, the September 2025 GST rationalisation reflects the state’s continued use of fiscal tools to guide industry behaviour. This time, the emphasis is on recalibrating the market structure – ensuring that mass demand is sustained, while also signalling where future investments in technology and manufacturing should flow. 

Rates on small petrol, CNG, and diesel cars (under 1,200–1,500 cc and ≤4 metres) were cut from 28% to 18%, effective September 22, 2025. The same reduction – from 28% to 18% – was applied to three-wheelers and buses or larger passenger vehicles, signalling a push for more affordable mobility options across private, shared, and public transport. These measures directly support price-sensitive first-time buyers, ease fleet purchases for ride-hailing and delivery operators, and help lower the cost of public transport while improving fleet electrification economics. 

The strongest signal for clean mobility came from fuel-cell motor vehicles, where the GST rate dropped from 12% to 5%, aligning incentives with India’s hydrogen roadmap. In contrast, hybrid vehicles with higher engine capacity saw a punitive increase to 40%, discouraging “luxury hybrids” that offer limited environmental benefits. 

Much like earlier tax interventions that boosted electrification, or nudged localisation, the September 2025 GST rationalisation reflects the state’s continued use of fiscal tools to guide industry behaviour.

On the supply side, GST on tractor parts was reduced from 18% to 5%, cutting input costs for rural equipment manufacturing and supporting job-creating localisation. 

Taken together, these reforms highlight a deliberate strategy: drive mass affordability (especially in compact cars, 3-wheelers, and buses) while signalling a technology-neutral but sustainability-first tilt – favouring EVs and hydrogen – and disincentivising high-capacity hybrids and luxury segments. The broader direction is towards catalysing volume adoption in clean mobility and building the demand certainty that can anchor investment in domestic EV and component ecosystems. 

India’s recent tax reforms mark a decisive shift in automotive policy by reshaping affordability, manufacturing, and incentivising the path to cleaner mobility. The most visible boost is for small car buyers: cutting GST from 28% to 18% has reduced prices, with major automakers already passing on the benefits. This should revive demand among first-time and middle-class buyers – segments crucial to India’s goal of becoming the world’s largest vehicle manufacturer by 2030, as outlined by Road Transport and Highways Minister Nitin Gadkari at the International Value Summit 2025. Lower purchase costs are set to expand the consumer base, accelerate production, and stimulate the supply chain. 

For electric vehicles, however, the picture is mixed. The 5% GST rate maintains stability, but excluding electric passenger cars from the new PM E-DRIVE scheme (launched in September 2024 to replace FAME-II with a ₹10,900-crore outlay) was a missed opportunity. While the scheme supports two- and three-wheelers, buses, and trucks, electric cars still cost 1.3–1.7 times more than petrol or diesel models. Despite EV car sales rising 93% year-on-year to 15,528 units in July 2025, they form only 4.7% of total passenger sales. Without renewed fiscal incentives, India risks missing its 30% electrification target for 2030. 

The reforms favour commercial fleets. Reducing GST to 18% for trucks, buses, and three-wheelers lowers acquisition and operating costs, improving fleet economics and reducing logistics expenses. PM E-DRIVE allocates ₹4,391 crore for 14,028 electric buses and targeted subsidies for electric three-wheelers and ambulances. All of these are measures expected to modernize public transport and electrify freight mobility. 

For component makers, a uniform 18% GST rate ends the long-standing inverted duty structure that locked up working capital and delayed refunds. This simplifies compliance, eases liquidity for MSMEs (owed over ₹26,000 crore by large manufacturers) and strengthens local sourcing and supply chain resilience. 

Battery manufacturing remains the weak link. The ₹18,100-crore PLI-ACC scheme has yet to yield commercial output, prompting Budget 2025 to exempt 35 capital goods and key minerals like cobalt and lithium scrap from import duties. Meanwhile, charging infrastructure lags: of 30,000 registered stations, barely half are operational. PM E-DRIVE’s ₹2,000-crore plan for 72,300 new chargers is vital to bridge this gap. 

The reforms lay a solid fiscal foundation, but India’s clean mobility transition will depend on tighter alignment between taxation, infrastructure, and domestic manufacturing –ensuring progress moves in sync across all fronts. 

Even with the 2025 GST reforms, several structural frictions continue to slow down the transition to sustainable mobility. 

The first is Input Tax Credit complexity. EVs are taxed at 5%, but key inputs like battery cells and power electronics still attract 18%. This inverted duty structure forces manufacturers to wait months for refunds, tying up as much as 7-8% of turnover in working capital. Fleet leasing companies face an added hurdle – GST law restricts credits on vehicles used for renting or hiring – so they carry a tax cost of 10-12% higher than outright buyers, which directly slows down fleet electrification. 

Second, there are component-level cost pressures. While finished EVs benefit from concessional GST, many critical inputs, chargers, BMS, electronics, remain expensive. Domestic MSME suppliers struggle to localise these parts competitively, leaving India’s EV value chain import-dependent and delaying investment in gigafactories and advanced manufacturing. 

Even with the 2025 GST reforms, several structural frictions continue to slow down the transition to sustainable mobility. 

And third, monitoring and evaluation gaps reduce policy effectiveness. When GST on small cars and three-wheelers was cut in 2025, price reductions varied widely across OEMs; some passed the relief on fully, others retained margins. Without digital tagging of EV-related HSN codes and systematic use of GSTN data, policymakers can’t track pass-through, localisation, or adoption trends in real time. That makes course corrections slower and leaves investors uncertain about the policy environment. 

The combined effect is that adoption becomes slower, costlier, and patchier than intended. Consumers pay more than the policy signal suggests, suppliers hesitate to localise, and investors remain cautious. Unless GST is streamlined to remove these frictions – and complemented by real-time monitoring- India risks falling short of its EV penetration and manufacturing leadership ambitions. 

India’s journey toward sustainable mobility hinges on well-calibrated fiscal policies that make electric vehicles affordable, manufacturing efficient, and progress transparent. incentives as levers for scale, innovation, and affordability. 

A tiered GST structure could make electric vehicles (EVs) more inclusive and fiscally balanced: 0% GST on EVs under ₹15 lakh to accelerate mass adoption, 5% for mid-range models, and 12% for premium EVs. Such calibration would widen access while preserving revenue neutrality. Reviving Section 80EEB of the Income Tax Act, the earlier ₹1.5 lakh income-tax deduction on EV loan interest, would further ease affordability barriers for price-sensitive consumers and sustain retail demand. 

On the supply side, India needs to consider cutting input costs to improve liquidity for local businesses. Extending customs duty exemptions, which are currently limited to 35 battery-related capital goods, to include motors, controllers, and power electronics would strengthen domestic manufacturing. Likewise, making the 90% provisional ITC refund permanent or introducing GST credit trading platforms would help MSMEs unlock working capital, a chronic weakness in the auto value chain. 

Battery production remains the largest strategic gap. The ₹18,100-crore PLI-ACC scheme has yet to yield concrete results at appreciable scale, suggesting the need for gradual domestic value addition (25%, 35%, 45%, and 55% over five years) instead of an ambitious 50% requirement upfront. Pairing this with R&D grants and technology transfer support for anodes, cathodes, and electrolytes. This together makes up 36% of total cell cost and the resultant incentives could attract global partnerships. Investments in battery recycling infrastructure would also ease dependence on imported lithium and cobalt. 

Infrastructure incentives must scale with production. Doubling the PM E-DRIVE allocation from ₹20 billion to ₹50 billion would fund nationwide charging coverage, ensuring no driver is more than 50 km from a fast charger. Mandating that 30% of installations be in tier-2 and tier-3 cities, along with viability gap funding for battery-swapping, would ensure equitable adoption. 

Finally, progress must be measurable. Blockchain-linked battery IDs could track subsidies, recycling, and second-life use, while a unified national charging app would simplify access and payments. Linking central funding to the India Electric Mobility Index (IEMI) would reward high-performing states. Together, these measures would transform GST from a revenue instrument into a strategic driver of clean, affordable, and globally competitive mobility.