Analysis of GST Impact on Electric Vehicles and Sustainable Business

This report examines the economic impact of the Goods and Services Tax (GST) on electric vehicles (EVs) and sustainable business practices in India. It begins by explaining the basics of GST, its rates, and the context of the discussion, focusing on the proposed reduction of GST on batteries from 28% to 5%. The analysis utilizes a supply and demand diagram to illustrate the effects of GST on battery prices, consumer and producer surplus, and deadweight loss. The report then discusses the government's promotion of EVs for sustainability, highlighting the cost implications of high battery prices due to GST. It further compares the effects of GST on EVs versus petrol and hybrid cars, noting the relatively inelastic price effects on petrol cars. Finally, the report discusses the government's initiatives to encourage EV usage by lowering GST rates, while also considering expert opinions on the potential benefits of waiving taxes on batteries and EVs for an initial period to boost market growth and consumer adoption. The report concludes by emphasizing the importance of government policies in promoting sustainable practices and the transition to EVs.

Running head: ECONOMICS FOR SUSTAINABLE BUSINESS
Economics for Sustainable Business
Name of the Student:
Name of the University:
Author note:

1ECONOMICS FOR SUSTAINABLE BUSINESS
Answer 1
GST stands for Goods and Services Tax. It is a revolutionary action in the taxation
system of the Indian economy. This is a comprehensive, destination-based, multistage, indirect
tax, to be imposed on every value addition of the goods and services produced in the country.
The main purpose of this law is to replace the previously existing several indirect taxes and
introduce a unified tax system. This tax system came into effect on 1st July, 2017. There are few
slabs for the GST rates, and those are 0%, 5%, 12%, 18% and 28% (Roy, 2017).
According to the report by Mishra (2017), the solar energy store manufacturers and the
power sector of India have urged the government to reduce the GST on batteries from 28% to
5%, as this is a vital component for power generation, sustainable energy and Electric Vehicles.
Since, it is an indirect tax, the burden is shifted onto the customers by the producers through
higher price of the product (Thorat, 2017).

2ECONOMICS FOR SUSTAINABLE BUSINESS
Price
Output
S
D3
D1
D2
P2
P5
P4
P3
P1
P6
D
C
B
A
E*
Q2 Q3 Q1
Figure 1: Impact of GST on the price of the battery
(Source: Author)
From the above diagram, it can be explained that, initially, the demand and supply of the
batteries was D1 and S respectively and initial equilibrium was at E*. After the imposition of
28% GST on the batteries, the demand for the batteries falls to D2, while supply remains fixed.
The line AD denotes the tax amount, i.e. 28% tax. It is levied on the price. The consumers are
paying a higher price due to GST, which is denoted by P5 and the producers are getting a lower
price, denoted by P2. Hence, consumer surplus is denoted by the triangle P6P5D and producer
surplus is denoted by P1P2A. The tax revenue is denoted by the rectangle AP2P5D. The
deadweight loss is the area ADE*. The quantity sold would be reduced from the initial quantity.

3ECONOMICS FOR SUSTAINABLE BUSINESS
When the GST falls to 5%, the demand for the batteries rises to D3. In this situation, the
tax revenue for the government falls, and is denoted by the straight line BC. In this scenario, the
consumers pay a lower price than for 28% GST, which is shown by P4. At the same time, the
producers get a higher price than earlier, denoted by P3. BCP4P3 refers to the tax revenue and
CDE* denotes the deadweight loss. The consumer surplus and producer surplus both increase,
shown by the area P6DP4 and P1P3C respectively. Thus, for a lower GST, the buyers and sellers
will be benefitted but the government revenue falls. The sales volume would increase under 5%
slab (Nguyen, Onnis & Rossi, 2017).
Answer 2
Electric vehicles (EV) are now being promoted by the government for sustainability. To
reduce the pollution and environmental damage, and for a sustainable future, the government of
India has set a goal to reach 100% Electric Vehicle nation by 2030. Hence, the government has
decided to keep the cars under the 12% GST slab. However, the rechargeable battery is one of
the major inputs of EVs. The cost of the battery comprises of almost half of the total price of the
vehicle (Businesstoday.in, 2017). Hence, the Electric vehicles are quite costlier than the regular
petrol, diesel and hybrid cars as it uses renewable source of energy. If the price of the battery is
increased due to the 28% GST, then the price of the EVs will shoot up significantly, and its
demand and sales would fall. If the GST on batteries falls to 5%, then the price for the battery
would go down, resulting in the fall of price for the EVs. Thus, its demand and sales would
increase in the long run. Thus, reducing the GST rate would bring more profit to the EV
manufacturers.

4ECONOMICS FOR SUSTAINABLE BUSINESS
Answer 3
The government of India has levied 28% GST and 1% to 15% cess on the petrol and
hybrid cars. It has made these cars significantly costly. The petrol cars run on petrol, which is a
non-renewable source of energy. The hybrid cars have both the battery as well as the fuel
combustion engine. Both of these cars use batteries along with fuel combustion engines.
However, these cars are not solely dependent on rechargeable batteries. Hence, the price rise of
the battery due to 28% of GST will not have much effect on the price of the petrol cars.
However, if the GST falls to 5% slab for the batteries, the petrol cars and the hybrid cars would
be slightly benefitted. The cars have become already expensive due to a higher GST and a GST
on the batteries would make these cars little more expensive. However, the petrol cars are
relatively inelastic to the price of the batteries; therefore, the price effect on the petrol car is
relatively lower (Bloomberg, 2017). However, in all the cases, the car companies would shift the
burden of the tax on the consumers by charging higher prices.
Answer 4
The initiative by the government to encourage the usage of more electric cars by 2030 is
definitely pushed by lowering the GST slabs for the Electric Vehicles. By keeping a lower rate
for EVs, the government is supporting the goal of making the country completely dependent on
EVs. This initiative is taken to reduce the pollutions caused by the conventional fuel. Hence, for
a sustainable future, reduction of the numbers of petrol and diesel cars is necessary. Therefore,
reduction of GST to 5% on the price of the rechargeable batteries would reduce the price of the
electric cars and its demand would rise (Businesstoday.in, 2017).

5ECONOMICS FOR SUSTAINABLE BUSINESS
However, according to some experts, the government should have waived the levy on the
batteries as well as on the electric cars for the initial 3-4 years. This would have encouraged
more people to buy the electric cars, and the companies would get first hand consumer
experience, feedback and customer base. This in turn would have helped the markets to increase
their efficiency and expertise in the manufacturing of the electric vehicles. In the long run, this
venture would not only have helped the government to develop an advantage in the automobile
manufacturing, but would also have helped in achieving the goal of being a 100% Electric
Vehicle nation before 2030 (Prasad & Agarwal, 2017).

6ECONOMICS FOR SUSTAINABLE BUSINESS
References
Bloomberg. (2017). GST: Highest Rate For Hybrids, Electric Vehicles Get Tax
Incentive. Bloomberg. Retrieved 2 September 2017, from
https://www.bloombergquint.com/gst/2017/05/19/gst-highest-rate-for-hybrids-electric-
vehicles-get-tax-incentive
Businesstoday.in. (2017). GST impact: Will Indian government's ambitious push to electric
vehicles kill hybrid segment?. Businesstoday.in. Retrieved 2 September 2017, from
http://www.businesstoday.in/sectors/auto/gst-impact-hybrid-car-segment/story/
255850.html
Mishra, T. (2017). Solar energy storage manufacturers want lower GST levy on batteries. The
Hindu Business Line. Retrieved 2 September 2017, from
http://www.thehindubusinessline.com/economy/policy/solar-energy-battery-
gst/article9758357.ece
Nguyen, A. M., Onnis, L., & Rossi, R. (2017). The Macroeconomic Effects of Income and
Consumption Tax Changes (No. 2017008).
Prasad, G., & Agarwal, M. (2017). Govt sets low GST rate for electric vehicles to boost sales,
but it’s not enough. http://www.livemint.com/. Retrieved 2 September 2017, from
http://www.livemint.com/Industry/OcpXxo4ix2qIQeljYbNGgK/Govt-sets-low-GST-rate-
for-electric-vehicles-to-boost-sales.html
Raj, R. (2017). Goods and Services Tax in India.

7ECONOMICS FOR SUSTAINABLE BUSINESS
Roy, A. (2017). GST in India: a Layman's Guide. Journal of Commerce and Management
Thought, 8(2), 219.
Thorat, Y. R. (2017). GST and Indian Economy. International Research Journal of
Multidisciplinary Studies, 3(7).