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Subsidies within the Automobile Industry in India

August 01, 2020

The Government is looking to expand its “Make in India” regimen through the provision of various schemes and subsidies within the Automobile Industry.

The Government is looking to expand its “Make in India” regimen through the provision of various schemes and subsidies within the Automobile Industry. At present the schemes developed by the Government aim at reducing imports, increase exports and promoting the use of biofuels like bioethanol, bio-CNG, bio-diesel as well as second generation biofuels which has only been made possible by the automotive industry through the reduction of carbon footprints in the nation. At the 58th AGM of the Automotive Component Manufacturers Association of India (ACMA) the officials reported that their primary concentration would be on innovating and building newer technology and research ambits in order to reduce and completely eliminate the wastage of wealth and the increased pollution in the environment.

The Association’s goal is to completely remove all such vehicles which contribute to the increased levels of pollution through the implementation of electric vehicles (EV’s) which will highly reduce pollution levels through the replacement of the internal combustion engine which is responsible for emitting polluted gases.

For this purpose, the Government of India was called to action to develop appropriate policies and schemes for the development of the automotive industry as a whole. The Heavy Industry Ministry is also involved in incorporating some of these schemes to develop a comprehensive auto policy. The Government is clearly also looking towards establishing newer technologies with regards to fuels and biofuels.

The announcement of the Faster Adoption and Manufacturing of Hybrid and Electric (FAME 2) Vehicles scheme would enable the progress of this sector immensely. It has been noted that the Government has aimed to acquire a national GDP of $5 trillion within the next seven years with manufacturing sector accounting for $1 trillion with the auto and auto component industry contributing significantly towards this goal.


There have been several schemes and policies which have been established around the world to support policy-driven adoption of plug-in electric vehicles. These incentives mainly take the form of purchase rebates, tax exemptions as well as tax credits. They also incorporate additional perks which include access to bus lanes as well as waivers on fees (charging, parking, tolls, etc). However, the cost of such financial incentives depend upon the particular vehicle battery size or all-electric ranges and more often than not, hybrid electric vehicles are included here.

  • The Government through the Ministry of New and Renewable Energy (MNRE), announced in 2010 a subsidy of ₹950 million for electric vehicles in order to boost their manufacturing rate. The subsidy provided benefits up to 20% over the ex-factory price, with a maximum benefit of ₹100,000 on electric cars, ₹4,000 on two-wheelers, ₹5,000 on high speed two-wheelers, ₹400,000 for electric minibuses as well as ₹60,000 for three-wheelers. In order to access the benefits of this subsidy, manufacturers simply required to certify that 30% of all the components of such a product were made in India. This scheme ended on 31 March 2012.
  • Furthermore, in the year 2014, the Government of India established a new policy for the provision of subsidies to hybrid and electric vehicles. This plan aimed at incorporating subsidies up to ₹150,000 for cars and ₹30,000 on two-wheelers. It was the primary goal of India to establish at least seven million electric vehicles on its roads by 2020-2021. While this has yet to be achieved, the Government continues to provide subsidies and aid this sector immensely for achieving this goal as soon as possible.
  • However, there aren’t any incentives or subsidies available for hybrids and imported vehicles, which in itself has been a major impediment to the growth of this sector. However, in order to meet its goals, the Government under the Paris Accord, has managed to set deadlines for 'Only Electric Vehicle (Manufacturing)' by the year 2030. Even though this project seems highly ambitious, there is a growing recognition of the need to incentivise the electric vehicle manufacturing sector under the “Make in India” framework along with a new policy and scheme for the same by the policy makers under the Government.
  • The infrastructure for electric vehicles, which is via charging is also being considered for incentives and schemes. This is provided either through the existing energy retailers such as fuel pumps or by subsidising manufacturers' investments in the field again.
  • Tesla Motors has been provided with specific tax benefits as well as a potential financial backing through the Special Purpose Vehicles ('SPV's) in order to establish a domestic manufacturing unit in India as well. Even though, there are local sourcing norms of 30%, electric vehicle entrants have been exempted from these. However, despite these wins, a lot of this progress and its continuity depends upon the government’s plan to subsidise the vehicles because of their high upfront cost which is the main factor which determines any and all potential growth within this industry.
  • As per the report submitted by the OECD , India is considered to be one of the countries which provides the least amount of subsidies in comparison to other major markets. This could be one of the major reasons why India may struggle to achieve its goal of manufacturing nearly 7 million electric vehicles by the year 2030. Various state governments and cities provide their own subsidies.
However, there exist several State Governments within our country which provide their own subsidies for the development of this industry. These have been enumerated below:

  1. Delhi, Rajasthan, Uttarakhand and Lakshadweep don't levy VAT
  2. Chandigarh, Madhya Pradesh, Kerala, Gujarat & West Bengal offer partial rebate on VAT.
  3. Delhi provides a 15% subsidy of the base price of select electric cars, such as REVA. It also exempts these cars from road tax and registration fee as well.


There exists a weighted tax deduction provided under section 35 (2AA) of the Income Tax Act. This weighted deduction of 200% is granted in order to assess and determine for any amount paid to any national laboratory, university or technological institute. The said amount is used only for scientific research within a program approved by the prescribed authority.


Section 35 (2AB) of the Income Tax Act, 1961 states that this weighted tax deduction of 150% of the expenditure incurred by the specified company, over scientific research for the in-house R&D centres must be approved by the prescribed authority. This however, does not include the expenditure on the cost of any land or building, incurred therein. The weighted tax deductions of 150% had been said to be effective until 31 March 2020. Consequently, the weighted tax deductions will be 100% as opposed to the previous 150%.


Furthermore, apart from the above mentioned incentives, each state in India offers additional incentives for industrial projects. These incentives are provided in the following order- rebates in land cost, relaxation in stamp duty exemption on sale or lease of land, power tariff incentives, a concessional rate of interest on loans, investment subsidies/tax incentives, backward areas subsidies, special packages for mega projects. Certain instances of these have been further given below:-

Andhra Pradesh

  1. The Government of Andhra Pradesh has committed itself to provide land at concessional rates, along with 24 hours of nonstop power supply.
  2. A capital subsidy of 50% for common infrastructure within the auto clusters and ASMC developers, up to a maximum of USD 3.07 Mn.
  3. Financial assistance limited to 75% of the cost, subject to a maximum of USD 38,461 for obtaining a patent registration. While 50% of all charges are subject to a maximum of USD 7,692 paid for acquiring quality certification. This is applicable only to the MSME units.
  4. Under marketing incentives, 50% of participation cost with a maximum amount of USD 7,692 to be reimbursed to at the most 10 MSME units annually, for participating in international trade fairs.


Auto component manufacturers can either avail general incentives under the Gujarat Industrial Policy 2015, or under the scheme for Mega / Innovative Projects.


Jharkhand introduced the Automobile and Auto Component Policy 2016 with an aim to make Jharkhand, a preferred destination for automobile and auto-component manufacturing units. Provision of financial assistance of 50% for fixed capital investments in building and common infrastructure up to a maximum of USD 3.07 Mn. 100% electricity duty exemption shall be provided for 10 years from the date of production.


  1. Under the Merchandise Export Incentive Scheme (MEIS), automobile manufacturers get a benefit of 2% on vehicle exports.
  2. About 20 tariff headings have been considered as “Sensitive items” to be maintained in the negative list of India in most of the trade agreements.


Incentives for units in SEZ/NIMZ as specified in respective acts or the setting up of projects in special areas like the North-east, Jammu & Kashmir, Himachal Pradesh and Uttarakhand.

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