India’s GST reform has linked rates on internal combustion engine (ICE) Vehicles to their length and engine displacement

Current Taxation System

• Basis for Tax: Currently, the government levies taxes based on two factors- the length of the vehicle and the engine’s capacity (displacement).
• GST and Cess: Vehicles are typically subject to 28% Goods and Services Tax (GST). Additionally, a Cess (a tax on tax for a specific purpose) is applied.
• Tax Criteria:
  • If a car is less than 4 metres long, the Cess applied is lower; if it exceeds 4 metres, the Cess is higher.
  • If the engine displacement is less than 1200cc, the Cess is lower; if it is greater than 1200cc, the Cess is higher.
• Flaw: The key deficiency is that the current system fails to consider the amount of pollution or carbon emission produced by the vehicle.

Shortcomings of the Present Taxation Policy in the Transport Sector

• Pollution Concerns: Current taxation policies do not adequately account for the pollution generated by Internal Combustion Engine (ICE) vehicles, despite the sector’s significant contribution to environmental degradation.
• Registration Trends: In 2024, around 71,000 vehicles were registered daily, of which 93% were ICE vehicles and only 7% were Electric Vehicles (EVs), reflecting limited policy push towards clean mobility.
  • Barriers to EV Adoption: High upfront costs, range anxiety (fear of running out of charge on long trips), and inadequate charging infrastructure hinder EV uptake.
• Mismatch with National Goals: India has pledged Net Zero Carbon Status before 2070, but current taxation measures are not aligned with this long-term target.

Proposed Solution: Bonus Malus System (Free Bet System)

• Introduces a third parameter—pollution—into the taxation framework.
  • Bonus: Tax discounts for purchase of low-emission, clean cars.
  • Malus: Extra tax/penalty for high-emission, polluting cars.

Advantages of the Bonus Malus System

• Revenue Neutrality: Funds collected from Malus penalties can finance Bonus discounts, ensuring fiscal balance.
• Emissions Reduction:
  • France (2008): Average new car emissions reduced by 9 g/km (double the EU average); low-emission car sales rose by 80%.
  • Netherlands (2005–2012): Achieved a 6.3 g/km reduction in emissions through a carbon-based tax.
• Revenue Positive Experience: France’s programme (2014–2022) generated more revenue from penalties than was spent on subsidies.
• Encouraging Innovation: Penalties push manufacturers towards Research and Development (R&D) for low-emission technologies.

Conclusion

Incorporating pollution metrics into vehicle taxation would improve the GST structure benefiting consumers, manufacturers, and the government, helping achieve the Net Zero Carbon Status goal.

DOWNLOAD PDF