Finance Minister Nirmala Sitharaman has announced a significant increase in customs duty on fully imported cars, including electric vehicles, in the Union Budget 2023-24. In her budget speech, she proposed a hike in duties to boost domestic manufacturing and promote green mobility.
Increased Customs Duty on CBUs
Customs duty on vehicles in completely built-up units (CBUs) has been increased from 60% to 70% for vehicles costing less than $40,000 or with a cubic capacity of fewer than 3,000 ccs for petrol vehicles and less than 2,500 ccs for diesel vehicles. The same increase applies to electric vehicles in CBU form with a CIF value of less than $40,000.
Raise in SKD Customs Duty
The budget also mentions that customs duties on vehicles, including electric vehicles, in semi-knocked down (SKD) form will be raised to 35% from the previous 30%. Currently, cars imported as CBUs with a CIF above $40,000 or with an engine displacement above 3,000 ccs in the case of gasoline vehicles and above 2,500 ccs in the case of diesel vehicles are subject to 100% customs duty.
Impact on Automobile Industry
Shamsher Dewan, Senior Vice President and Group Head, of Icra Corporate Ratings, stated that the proposed increase in duties is unlikely to have a significant impact as most luxury cars are now assembled in India. However, the hike in duties aims to promote domestic manufacturing in the future.
Boost to Green Mobility
The Finance Minister proposed to give a further boost to green mobility by extending customs duty exemption to the import of capital goods and machinery required for the manufacture of lithium-ion cells for batteries used in electric vehicles. She also noted that the replacement of old polluting vehicles is an important part of the “greening of the country’s economy” and allocated sufficient funds for scrapping old vehicles of the Central Government and for supporting states in replacing old vehicles and ambulances.
Favourable for Automobile Sector
Dewan also noted that multiple proposals in the Union Budget are considered favourable for the automobile sector, including a sharp 33% increase in capital investment, identification of critical transportation projects for first and last mile connectivity, and relaxation of personal tax rates. The push for green energy continues with a dedicated budget allocation for scrapping old vehicles, energy transition and viability gap funding for battery storage solutions with 4000 MWh.
Challenges for Tire Industry
Dewan mentioned that the increase in customs duty on composite rubber from 10% to Rs. 25 or Rs. 30 per kg, whichever is lower, is a challenge for the tire industry, which heavily relies on imported rubber.
The exemption of customs duties on the import of capital goods for the manufacture of lithium-ion cells for batteries used in electric vehicles will facilitate the development of the electric vehicle ecosystem and contribute to faster penetration.