Union Budget 2025-26: Will Vehicles Become Cheaper or Costlier?
Rationalising customs duties on EVs, automotive components, and battery components is anticipated, aiming to strengthen the industry’s foundation.
Written by Saurabh Agarwal and Parul Nagpal
India’s automotive industry, a major contributor to economic growth, has rapidly established itself as the third-largest market in the world. This impressive progress is largely driven by shifting consumer preferences, a growing emphasis on eco-friendly transportation, and proactive government initiatives. Initiates such as the production-linked incentive (PLI) for automobiles, FAME-II, and the newly introduced PM E-DRIVE and SMEC schemes have played a pivotal role in this transformation.
With the Union Budget 2025-26 on the horizon, stakeholders are eager to understand how new policies will impact vehicle affordability and the overall industry. Central to these expectations are measures promoting eco-friendliness, innovation, and employment generation. The big question
remains: Will the Budget make vehicles costlier or cheaper?
Boosting domestic manufacturing through incentives
India’s reliance on imported lithium-ion cells, primarily from China, is a challenge for the local EV industry. To tackle this, in Budget the government may introduce incentives under the ‘Aatmanirbhar Bharat’ initiative, promoting local manufacturing by allocating funds to existing PLI and
other incentive schemes like PM E-DRIVE, SMEC, etc. This will enable manufacturers to continue passing the benefits by way of price reduction for the components and ultimately a reduction in price of eligible automotive vehicles (primarily EVs).
Further, the government is deliberating to provide incentives for battery component manufacturing and presently in the process of identifying locally produced battery components that need financial support. More clarity with respect to what all components have been identified till now will help
industry priortise manufacturing such components and will give an opportunity to the auto original equipment manufacturers (OEMs) to optimise their cost of procurement for such components and thereby giving an opportunity to reduce prices of eligible automotive vehicles (primarily EVs or HEVs) for end customers.
Disincentivising imports by Customs duty rate rationalisation
Rationalising customs duties on EVs, automotive components, and battery components is another anticipated move aiming to strengthen the industry’s foundation. This will enable domestic manufacturers to claim a bigger pie in global supply chain, however, there is a risk of increase in
prices of the goods manufactured using the imported components.
Creating a robust EV infrastructure is vital for India’s transition to sustainable mobility. While the PM E-DRIVE scheme has already laid the groundwork by emphasising infrastructure development, there is still a need to address battery recycling and waste management. Introducing innovative ownership options, such as battery leasing or subscription models, could lower the initial cost of EVs, broadening
their appeal.
Although GST council is the decision maker for all the matters relating to GST and the timing for announcements related to GST rates are kept separate than the Union Budget announcements. Therefore, there is unlikely to have any impact on GST cost of automobiles in this Union Budget.
Conclusion: The road ahead
Motor vehicle prices in India are shaped by a variety of interconnected factors, including global commodity prices, import duties on raw materials, supply chain disruptions, and taxation policies. Experts predict a rise in passenger car prices by the end of 2025 compared to 2024, owing to
anticipated hikes in taxes, import duties, and insurance premiums, coupled with the ongoing escalation of global commodity prices and persistent supply chain challenges
The Union Budget 2025-26 presents a critical opportunity for the government to influence the trajectory of India’s automotive sector. By addressing the issues mentioned above, the government can strike a balance between vehicle affordability and sustainable growth.
The key question is: Will vehicles become more affordable or expensive? The answer lies in how effectively the budget tackles the challenges of rising costs and supply chain disruptions while fostering a competitive environment for manufacturers. By implementing policies aimed at reducing
production costs, promoting innovation, rationalising taxes and supporting sustainable practices, the government can influence the affordability of vehicles and boost consumer confidence. Having said that, it is recommended that the government exercise due caution while using import duty
rationalisation to boost manufacturing in India, on account of the possibility of increase in the prices of auto components and vehicles in the short run.
Saurabh Agarwal and Parul Nagpal are tax partners at EY India
Written by Saurabh Agarwal and Parul Nagpal
India’s automotive industry, a major contributor to economic growth, has rapidly established itself as the third-largest market in the world. This impressive progress is largely driven by shifting consumer preferences, a growing emphasis on eco-friendly transportation, and proactive government initiatives. Initiates such as the production-linked incentive (PLI) for automobiles, FAME-II, and the newly introduced PM E-DRIVE and SMEC schemes have played a pivotal role in this transformation.
With the Union Budget 2025-26 on the horizon, stakeholders are eager to understand how new policies will impact vehicle affordability and the overall industry. Central to these expectations are measures promoting eco-friendliness, innovation, and employment generation. The big question
remains: Will the Budget make vehicles costlier or cheaper?
Boosting domestic manufacturing through incentives
India’s reliance on imported lithium-ion cells, primarily from China, is a challenge for the local EV industry. To tackle this, in Budget the government may introduce incentives under the ‘Aatmanirbhar Bharat’ initiative, promoting local manufacturing by allocating funds to existing PLI and
other incentive schemes like PM E-DRIVE, SMEC, etc. This will enable manufacturers to continue passing the benefits by way of price reduction for the components and ultimately a reduction in price of eligible automotive vehicles (primarily EVs).
Further, the government is deliberating to provide incentives for battery component manufacturing and presently in the process of identifying locally produced battery components that need financial support. More clarity with respect to what all components have been identified till now will help
industry priortise manufacturing such components and will give an opportunity to the auto original equipment manufacturers (OEMs) to optimise their cost of procurement for such components and thereby giving an opportunity to reduce prices of eligible automotive vehicles (primarily EVs or HEVs) for end customers.
Disincentivising imports by Customs duty rate rationalisation
Rationalising customs duties on EVs, automotive components, and battery components is another anticipated move aiming to strengthen the industry’s foundation. This will enable domestic manufacturers to claim a bigger pie in global supply chain, however, there is a risk of increase in
prices of the goods manufactured using the imported components.
Creating a robust EV infrastructure is vital for India’s transition to sustainable mobility. While the PM E-DRIVE scheme has already laid the groundwork by emphasising infrastructure development, there is still a need to address battery recycling and waste management. Introducing innovative ownership options, such as battery leasing or subscription models, could lower the initial cost of EVs, broadening
their appeal.
Although GST council is the decision maker for all the matters relating to GST and the timing for announcements related to GST rates are kept separate than the Union Budget announcements. Therefore, there is unlikely to have any impact on GST cost of automobiles in this Union Budget.
Conclusion: The road ahead
Motor vehicle prices in India are shaped by a variety of interconnected factors, including global commodity prices, import duties on raw materials, supply chain disruptions, and taxation policies. Experts predict a rise in passenger car prices by the end of 2025 compared to 2024, owing to
anticipated hikes in taxes, import duties, and insurance premiums, coupled with the ongoing escalation of global commodity prices and persistent supply chain challenges
The Union Budget 2025-26 presents a critical opportunity for the government to influence the trajectory of India’s automotive sector. By addressing the issues mentioned above, the government can strike a balance between vehicle affordability and sustainable growth.
The key question is: Will vehicles become more affordable or expensive? The answer lies in how effectively the budget tackles the challenges of rising costs and supply chain disruptions while fostering a competitive environment for manufacturers. By implementing policies aimed at reducing
production costs, promoting innovation, rationalising taxes and supporting sustainable practices, the government can influence the affordability of vehicles and boost consumer confidence. Having said that, it is recommended that the government exercise due caution while using import duty
rationalisation to boost manufacturing in India, on account of the possibility of increase in the prices of auto components and vehicles in the short run.
Saurabh Agarwal and Parul Nagpal are tax partners at EY India
