Several policy-related announcements were also made during 2025 to support the transition towards green mobility and provide a boost to the EV segment.

The recent rate rationalisation under the Goods and Services Tax (GST) law is a positive development for the automotive sector. Under the revised structure, GST rates on automobiles and components have been grouped into three categories, with five percent applied to Electric Vehicles (EV), 18 percent to mass-market two-wheelers, small cars and auto parts and 40 percent to high-end cars and bikes.

Most notably, the levy of Compensation Cess on the sale of Internal Combustion Engine (ICE) vehicles has been discontinued with effect from 22 September 2025.

As the automotive industry looks ahead to the upcoming Union Budget, continuity and clarity will be critical. Following the implementation of GST reforms, the sector stands at a pivotal inflection point, where sustained and predictable policy support can help accelerate recovery and stimulate long-term demand.

“Rationalisation of the duty structure, particularly for the rapidly growing electric vehicle (EV) segment along with well-calibrated incentives for global automobile manufacturers investing in sustainable mobility, would serve as strong catalysts for the industry. The government’s focus on expansion of charging infrastructure in the country will act as an impetus to green mobility. Such measures can not only strengthen India’s position as a progressive automotive market but also reinforce the country’s transition towards cleaner, safer and more sustainable transportation,” said Jyoti Malhotra, MD, Volvo Car India.

Recent rate rationalisation under GST has brought down the overall tax incidence on the sale of vehicles. Further, levy of Compensation Cess on sale of vehicles has been discontinued with effect from 22 September 2025, as part of the overhaul of the GST structure. However, the withdrawal of the levy of Compensation Cess on the sale of ICE vehicles has led to the accumulation of Input Tax Credit (ITC) on the inventory held by dealers.

“Clarification regarding Compensation Cess to ease working capital strains would mitigate adverse impact on working capital requirements on account of Compensation Cess accumulation on inventory in the hands of automotive dealers,” said Rajat Mahajan, Partner and Automotive Sector leader.

Furthermore, EV manufacturers in India continue to face challenges under the inverted duty structure, as the GST rate on electric vehicles is only five percent, while most key inputs and components attract significantly higher rates.

“This disparity leads to the accumulation of input tax credit and working capital strain. Post-overhaul of the GST rate structure, while the rate of tax was reduced on parts and components from 28 percent to 18 percent, it provides partial relief to EV manufacturers, as tax rate disparity persists for critical inputs vis-à-vis the finished goods. Inverted Duty Structure (IDS) for EV manufacturers will help reduce working capital blockages leading to improved operational cash flow,” Mahajan added.

As the Union Budget 2026 approaches, the electric bus ecosystem is looking for targeted policy support that enables scale beyond public transport undertakings and brings private operators meaningfully into India’s clean mobility transition. “A key expectation is the extension of direct subsidies under FAME and PM E-DRIVE to private intercity and contract operators, who today remain largely outside the incentive framework despite being critical to faster deployment. Equally important is easing access to capital through interest subvention and green financing options, with affordable loan rates in the range of four to six per cent, which can significantly improve project viability for electric bus investments,” said Devndra Chawla, MD & CEO, GreenCell Mobility.

The PM Electric Drive Revolution in Innovative Vehicle Enhancement (PM E-DRIVE) Scheme has been extended until 31 March 2028 in respect of e-buses, whereas incentives in the form of upfront discounts were announced for e-trucks under the said scheme.