Answer

Introduction

Internal Combustion Engine (ICE) vehicles, powered by fuel combustion, dominate India’s transport sector and contribute significantly to emissions. Current GST reforms focus on engine size and length rather than carbon output. Emissions-based taxation can incentivize manufacturers to adopt cleaner technologies and nudge consumers toward low-emission vehicles, supporting India’s climate and sustainability goals.

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How indirect tax policy can push ICE vehicle manufacturers toward low-emission technologies

• Emissions-linked GST rates: Tax rates can be structured based on a vehicle’s carbon emissions rather than engine size, encouraging manufacturers to produce cleaner vehicles.
  Eg: France’s emission-linked fee structure in 2008 led to a reduction of 9g/km in the new passenger car fleet.
• Feebate incentives for manufacturers: Higher taxes on high-emission vehicles can fund rebates or tax credits for low-emission vehicle production, motivating manufacturers to innovate.
  Eg: Sweden’s bonus-malus system in 2018 incentivized automakers to increase electric vehicle production, boosting EV registrations.
• Investment-linked tax incentives: Tax deductions or credits can be provided for manufacturers investing in low-emission technology R&D and production.
• Tiered excise duties based on emission standards: Implementing higher excise duties for vehicles exceeding specific emission thresholds can push manufacturers to meet stricter standards.
  Eg: The Netherlands’ carbon-based vehicle taxation between 2005-2012 resulted in a reduction of 6.3g/km in emissions for new cars.
• Incentivizing green production practices: Tax policies can reward manufacturers adopting sustainable production processes, such as cleaner energy use in assembly plants.

How indirect tax policy can guide ICE vehicle consumers toward low-emission choices

• Lower GST for low-emission vehicles: Reduced tax rates for vehicles with lower carbon emissions make them more affordable, nudging consumer preference.
  Eg: India’s 5% GST rate on electric vehicles has already made EVs more attractive compared to high-emission ICE vehicles.
• Feebate systems for consumers: Consumers purchasing high-emission vehicles pay higher taxes, while low-emission vehicle buyers receive rebates, creating financial motivation to choose cleaner options.
• Incentives for hybrid and small-engine vehicles: Tax reductions for hybrid vehicles or ICE vehicles with lower emissions encourage consumers to opt for environmentally friendly models.
• Long-term cost savings through tax policy: Reduced indirect taxes lower upfront costs for low-emission vehicles, highlighting lifetime savings on fuel and maintenance to consumers.
• Public awareness through tax differentiation: Clear tax differentiation between high- and low-emission vehicles signals environmental priorities and nudges consumer behavior.

Conclusion

Indirect tax policy can drive India’s transition to sustainable mobility by aligning economic incentives with environmental goals. Emissions-based taxation, rebates for low-emission vehicles, and incentives for manufacturers to adopt clean technologies can accelerate the shift from high-emission ICE vehicles, supporting India’s long-term climate commitments.

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