Nitin Gadkari Backs Tax Cut For Hybrid Vehicles. Who Stands To Benefit?

The Minister of Road, Transport and Highways, Nitin Gadkari, recently proposed tax reduction for hybrid vehicles to stimulate adoption in the Indian market, and this may benefit the incumbent players.

Currently, a tax of 28-43% is levied on hybrid vehicles, across variants. The minister has proposed to cut this down to 12%.

A tax cut would reduce prices of hybrid vehicle options in the market, which have seen slower up-take, compared to electric vehicles. Automobile companies like Maruti Suzuki India Ltd., Toyota Kirloskar Motor Pvt. and Honda Cars India Ltd. with presence in the hybrid segment could potentially benefit from the tax.

Currently, four-wheeler electric vehicles representing close to 5% of total sales. Tata Motors Ltd. accounted for roughly 70% of the total EV sales in calendar 2023, according to VAHAN. The company also launched EV versions of its Nexon and Punch models. MG, Mahindra & Mahindra Ltd. and BYD India are other auto companies that have launched cars in the segment.

Tax on EVs stands at 5%, compared to 28-43% for hybrid cars. A 12% tax for hybrid vehicles, would reduce the total cost of ownership by 21%, according to Kotak Securities Ltd. It would get the vehicles more parity with electric vehicles and give consumers a viable alternate choice, it said.

But who would be the key beneficiaries of this reduction?

Most hybrids on road are launched by Japanese automakers such as Toyota, Honda and Suzuki.

Maruti's Grand Vitara SUV and Invicto MPV, Toyota's Hycross and Urban Cruiser, and Honda's City are some of the hybrid vehicles in the market at present.

With the tax reduction, hybrids like Grand Vitara, with an ex-showroom price of Rs 19.93 lakh would cost Rs 15.78 lakh.

While, Toyota's Hycross which costs Rs 25.21 lakh would be down to Rs 19.96 lakh.

One of the key beneficiaries of this tax reduction could be Maruti Suzuki. The Grand Vitara's acceptance in the SUV space also helped arrest further market share decline on an overall basis to 42%.

According to Motilal Oswal Financial Services Ltd., the company has been selling roughly 10,000 units per month of the Grand Vitara. While the split of the share between petrol and hybrid variants isn't available, this would largely be in the petrol engine type, based on the price difference among the two variants.

Kotak Securities expects the price of Maruti Suzuki Grand Vitara Hybrid to be down to Rs 13.4 lakh from Rs 17 lakh, much closer to its petrol version, in case of tax reductions.

The company has an annual capacity of roughly 20 lakh and in its recent conference call affirmed its commitment to double its capacity by 2030. The first phase of this expansion of 250,000 units will be operational in Kharkhoda by 2025 and this will be further increased to 10 lakh units by 2030.

Overall sales of hybrids has also been increasing over the last two years, rising to 2.4% of all four wheeler sales in calendar year 2023.

While share of hybrids sales has increased over the last eight quarters, adoption of EVs has come down over the last two quarters.

With new EV launches expected, it remains to be seen if the tax reductions for hybrids, leads to price cuts from EV players.