Impact of Battery GST Reduction on EV Sales

This assignment analyzes the potential impact of reducing the Goods and Services Tax (GST) levied on batteries for electric vehicles (EVs). It explores how a lower battery price could influence consumer demand for EVs compared to petrol vehicles. The analysis considers the concept of substitutes in economics and demonstrates the shift in demand towards EVs with a reduced battery price. The assignment also emphasizes the government's objective of promoting EVs due to environmental concerns related to carbon emissions. Ultimately, it argues that reducing the GST on batteries aligns with the government's 2030 goal of 100% electric vehicle adoption.

Running Head: GST Levy on Batteries
The Impacts of Cutting GST tax on Batteries and Related Products
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GST Levy on Batteries 2
The Impacts of Cutting GST tax on Batteries and Related Products
Part 1
Just like the production of any other commodity in Australia, batteries production is
governed by regulations. Tax has to be paid to the government for production of goods or
services. The current GST levy tax on batteries of 28% is very high according to the complained
posed by the battery manufactures. The high tax is preventing them from producing many
batteries (Autocarindia.com, 2017). The government has an aim of a complete transformation
from petrol to electric vehicles; however, this decision is interdependent on batteries production.
The lower production level of batteries is limiting the supply and thus the final output can only
sell at higher prices creating an obstruction to the government’s objective of achieving a 100%
shift to electric vehicles by the time we get to 2030. Now the question is how the tax levy affects
the production level? Since tax is a mandatory obligation of which has to be paid even if the
company is making losses, it is a cost to the production process and it cannot be ignored. The
higher tax levy thus makes the production operations more expensive.
On the other hand, the producing companies may shift the tax incidence to the
consumers, but the tax is so big such that the producers’ obligation is still too large after
transferring some of the incident tax. There are several factors that affects the transfer such as
elasticity of demand to battery price changes. The Indian battery market will benefit from the tax
reduction to 5% bracket since it will translate to a lower production cost and the quantity of
batteries produced will rise; the higher quantity level will result in falling prices. Selling at a
lower price will benefit the consumers causing their surplus to rise. The producer surplus will
rise for selling many units though at a lower price.

GST Levy on Batteries 3
Fig: The impact of lower price on Batteries
Price of Batteries
a
S1 (High Tax)
S2 (lower Tax) i
b
c h g
d f
e D
Qi Qc Battery Quantity
At the high tax rate, the equilibrium point is at point i with quantity Qi supplied at a high
price b. the consumers surplus at the high price is area abi and the producer surplus is area bdi.
The reduction of tax will lower the cost of production and the supply level will shift to the right
to the curve S2 (low Tax) (Quantity Qc). The increase in supply will fall prices to fall to level c.
the consumer surplus will rise from area abi to aihc and the producer surplus area will increase
from area bdi to chfe. The deadweight loss equal to igf will be experienced.
Part 2
A rechargeable battery being an input for electric vehicles means that the two are
complement goods. Since the price for batteries is expected to be lower from the reduction of
GST, we shall analyze the impact of this on the electronic vehicles. Many economists have laid
out an idea that the price for complement goods affect the other good in an opposite manner

GST Levy on Batteries 4
(Spacey, 2016). For this case, the lower price for batteries will cause the supply for batteries to
rise, and the price will fall; consequently, the demand for electric vehicles (the complement
good) will also rise (Munson, 2014). The battery storage manufacturers will make huge profit in
the short run since they will produce at a lower cost and the demand will be high, hence the units
sold will be many. Profit in the long run will be reduced since the high profit will attract many
competitors who will share the profit until it’s exhausted.
Fig: The impact of low battery prices on Electric vehicles
Price for Batteries
Pc
Pf
Qc Qf Electric Vehicles
Qc is the current quantity of electric vehicles on demand and Pc is the current price for
batteries. If the GST is lowered according to the proposal, and the battery price falls to Pf in the
future, the demand for electric vehicles will in future rise to Qf. This is because complement
goods have negative cross elasticity of demand (Pettinger, 2012).

GST Levy on Batteries 5
Part 3
There are two primary types of vehicles on demand; one is the petrol vehicles and the
other is the electric vehicle. If a consumer demands one of the two types, he/she does not
demand the other. For this reason, the two types of vehicles are substitutes. The choice of a
substitute good is affected by the price of the other good in a similar manner (Chand, 2016). If
the price of a good falls, the other good’s demand falls because most consumers will demand
more of the good with the falling price (Aggarwal, 2011). Substitutes have a positive cross
elasticity of demand (Parikh, 2010).
Fig: Impact of low battery price on petrol vehicles
Price for Batteries
D
Pc
Pf
Qf Qc
The current demand for petrol vehicle is quantity Qc, while the price for batteries is PC. The
GST levy reduction will lower the future price for batteries to Pf, the demand for petrol vehicles
will fall in the future to Qf since consumers will demand more electric vehicles.

GST Levy on Batteries 6
Part 4
The analysis above on the impact of the reduction on GST tax levy for batteries have
confirmed that in fact there will be an increased demand for electric vehicles and a decreased
demand for petrol vehicles. The government is aiming to lower the usage of petrol vehicles due
to environmental concerns raised by carbon emissions. Thus lowering the GST will help in
reaching the 2030 goal of 100% electric vehicles and thus the minister should consider approving
this proposal.

GST Levy on Batteries 7
References
Aggarwal, K. (2011). CPT General Economics. S.l.: S Chand & CO LTD.
Autocarindia.com. (2017). EV industry wants lowering of 28% GST on batteries. Autocar India.
Retrieved 2 September 2017, from http://www.autocarindia.com/car-news/ev-industry-
wants-lowering-of-28-gst-on-batteries-405298.
Chand, S. (2016). Effect of Demand Curve on Substitute Goods and Complementary Goods |
Micro Economics. YourArticleLibrary.com: The Next Generation Library. Retrieved 2
September 2017, from http://www.yourarticlelibrary.com/economics/effect-of-demand-
curve-on-substitute-goods-and-complementary-goods-micro-economics/8914/.
Munson, I. (2014). Economics Explained: Complements, Substitutes, and Elasticity of Demand.
EconoGIST. Retrieved 2 September 2017, from
http://www.econogist.com/home/complements-and-substitutes.
Parikh, V. (2010). Substitutes and Complementary Goods. Letslearnfinance.com. Retrieved 2
September 2017, from http://www.letslearnfinance.com/substitute-and-complementary-
goods.html.
Pettinger, T. (2012). Complementary Goods. Economicshelp.org. Retrieved 2 September 2017,
from http://www.economicshelp.org/blog/glossary/complementary-goods/.
Spacey, J. (2016). 11 Examples of Complementary Goods. Simplicable. Retrieved 2 September
2017, from https://simplicable.com/new/complementary-goods.