University Economics Report: GST Impact on Batteries, EVs, and Petrol

This report examines the economic implications of reducing the Goods and Services Tax (GST) on batteries in India. It analyzes the impact on battery prices, quantity demanded, consumer and producer surplus, and the electric vehicle (EV) market. The study investigates how a GST reduction from 28% to 5% affects the demand for EVs as a complementary good and petrol vehicles as substitutes. The report further assesses the long-term effects on EV profitability and the Indian government's goal of achieving 100% EV adoption by 2030, considering infrastructure limitations. The analysis uses economic principles to demonstrate how tax policies can influence market dynamics and consumer behavior within the context of sustainable business practices.

Running Head: ECONOMICS FOR SUSTAINABLE BUSINESS 1
Economics for Sustainable Business
Following the guidelines of the Course ID guidelines
Student’s Name
University

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Introduction
On the subject of implementing the Goods and Services Tax (GST) in India, the study
identifies the impact of lowering the GST levy on batteries from 28 percent to 5 percent on the
Indian battery market in terms of price, quantity demanded, consumer and producer surplus
(Mishra, 2017). Also, the study evaluates the impact of the same on Electric Vehicle market as
well as the petrol vehicle market in India. Lastly, the influence of the proposal of lowering the
GST on batteries on the Indian government’s target of 100 percent EV nation by 2030 has been
discussed in the essay paper as well.
Q1
By lowering the GST levy on batteries from 28% to 5%, the purchasing price of battery
will be reduced. As the consumers have to pay less tax, it can impact the selling price of a battery
(Creedy, 2016). In the meanwhile, if the other factors such as supply side remain constant, a
price drop due to tax reduction can increase the quantity demanded in the free market.
Figure: Impact of Tax Deduction on Demanded Quantity of batteries

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Source: (Forstater, 2017)
As described in the above figure, decrease in the GST levy on batteries from P1 to P2
will also reduce the price of batteries. Therefore, the quantity of battery demanded will increase
from Q1 to Q2. Evidently, the consumer and producer surplus of battery market will be affected
due to decline in the GST levy. Clearly, lower price of batteries due to tax deduction should
increase consumer surplus. In the meanwhile, due to price fall in batteries, the quantity
demanded of the product will be increased. Hence, the consumer surplus will be increased
(Cowan, 2012). On the other hand, lower price of batteries will reduce the producer surplus if
other factors remain constant. Invariably, if the cut down on the GST levy reduce the price, it
contributes towards lower potential producer surplus as goods supplied will be reduced (Ma,
2015). Therefore, the triangle of producer surplus will be smaller indicating lower producer
surplus.
Q2
However, the reduction in the GST on batteries will reduce the manufacturing cost of the
EV that will further help the EV producers to reduce the price of the vehicles in the market.
Hence, the fall in the price of EV being a complementary product will result in an increase in the
demand for the product in the short run (Balkyte & Tvaronavičiene, 2010). A diagram has been
presented herein below for further understanding:

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Figure: Demand for EV in short run
Source: (Taylor, Stonebarger & Leven, 2015)
It can be seen from the above diagram that reduction in the tax on battery will reduce the
price of EV in the short run. However, the demand curve will stick at D and there will be no
change in the quantity supplied in the short run. Hence, an increase in the quantity demanded for
EV can be evident from Q1 to Q2. Therefore a rise in the profitability will be seen in the case of
EV as no change is occurring in the profit margin for the EV producers (Bochet, İlkılıç, Moulin
& Sethuraman, 2012). On the other hand, in the long run, the increase in the demand will result
in a rightward shift in the demand curve from D to D1, whereas the quantity supplied will also
increase from S1 to S2 due to better utilisation of resources (Please refer to the diagram given
below). Hence, no changes will be evident in the price of Electric Vehicles. However, the
increase in the consumption in the long run will further enhance the profitability of the EV
producers (Balkyte & Tvaronavičiene, 2010). A diagram has been presented herein below for
better understanding:

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Figure: Demand and Supply of EV in long run
Source: (Taylor, Stonebarger & Leven, 2015)
Q3
In the case of substitute goods such as petrol vehicles, the reduction in the GST rate from
28 percent to 5 percent on batteries will reduce the price of electric vehicles more than petrol
vehicles. Hence, a reduction in the price of EV will directly impact the quantity demanded of
petrol vehicles in India (Bochet, İlkılıç, Moulin & Sethuraman, 2012). Using the theory of
demand, a diagram has been presented herein below for better understanding:

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Figure: Impact of fall in Price on Substitute Products
Source: (Taylor, Stonebarger & Leven, 2015)
On the basis of the above diagram, a fall in the price of EV from P to P1 will lead to a fall
in the quantity demanded for petrol vehicles from Q to Q1. Hence, the sales of petrol vehicles
will be significantly impacted by the new policy of the Indian Government.
Q4
The proposal of lowering the GST on batteries by solar energy storage manufacturers will
certainly help the plan of the Indian government to reach a higher percentage EV nation by 2030
although it is next to impossible to achieve the tagline of 100 percent EV nation.
Understandably, the deduction in GST levy on the batteries will increase the demand for the
batteries as prices will drop down. In this scenario, due to drop in prices, the price of Electric

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Vehicles will be lower as the battery is complementary goods for EV. Hence, lowering the GST
on complementary goods of EV will be helpful to reduce the price of EV in the Indian market.
On the other hand, EV can be identified as a substitute product for petrol run vehicle.
Therefore, increase in demand for EVs can create a negative impact on the petrol run vehicle
market. Clearly, the target audience will prefer to purchase EVs in the changing economic
scenario. Therefore, the government’s push to reach a 100 percent EV nation by 2030 will get a
boost. However, not all the people will buy EV depending on certain factors such as lack of
electricity charging stations in rural areas. In the meanwhile, considering the environmental
factors and economic benefits, the Minister of State for Power, Coal, and New & Renewable
energy should consider the proposal of lowering GST levy on batteries.
Conclusion
It can be seen from the above analysis that the fall in the GST rate on battery will directly
increase the demand for electric vehicle in the Indian market. On the other hand, it is quite
difficult to achieve the target of 100 percent EV nation by 2030 due to lack of infrastructure and
innovations in the petrol vehicle industry. Furthermore, it is important to note that the reduction
in the price of battery will also reduce the cost of petrol vehicle by a smaller amount. However,
the 5 percent GST policy will help the Indian Government to achieve a higher target as compared
to the 28 percent GST rate.

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References
Balkyte, A., & Tvaronavičiene, M. (2010). Perception of competitiveness in the context of
sustainable development: Facets of “sustainable competitiveness”. Journal Of Business
Economics And Management, 11(2), 341-365.
Bochet, O., İlkılıç, R., Moulin, H., & Sethuraman, J. (2012). Balancing supply and demand under
bilateral constraints. Theoretical Economics, 7(3), 395-423.
Cowan, S. (2012). Third-Degree Price Discrimination and Consumer Surplus. The Journal Of
Industrial Economics, 60(2), 333-345.
Creedy, J. (2016). Measuring welfare changes and tax burdens (4th ed.). Cheltenham, UK:
Edward Elgar.
Forstater, M. (2017). Economics (6th ed.). London: A. & C. Black.
Ma, T. (2015). Long-Run Industry Supply Curve and Producer Surplus. Journal Of Economics
And Development Studies, 3(2).
Mishra, T. (2017). Solar energy storage manufacturers want lower GST levy on batteries. The
Hindu Business Line. Retrieved August 2017, from
http://www.thehindubusinessline.com/economy/policy/solar-energy-battery-gst/
article9758357.ece
Taylor, T., Stonebarger, T., & Leven, J. (2015). Economics (5th ed.). Chantilly, VA: Teaching
Co.