The landscape of Indian automobile exports is set for a monumental transformation as the European market prepares to welcome Indian manufactured vehicles under a new trade regime. The draft of the Free Trade Agreement (FTA) between India and the European Union (EU) has been revealed, signaling a major breakthrough for the Made in India initiative. This agreement, which reached a consensus on 27 January of this year, is expected to be officially signed by the end of 2024, with full implementation likely starting next year. Once active, this deal will pave the way for hundreds of thousands of Indian cars to traverse European roads, Importantly boosting the country's export momentum and strengthening economic ties between the two regions.
The Mathematics of Concessional Duties
According to the draft released by the European Union, a specific quota system has been established to facilitate the entry of Indian vehicles. Initially, 2 lakh 50 thousand Indian cars will be allowed entry into the European market every year. During the first year of the agreement, these vehicles will attract a modest import duty of only 8 percent. This concessional rate applies to Internal Combustion Engine (ICE) vehicles, including petrol and diesel variants, as well as hybrid cars, provided their Cost, Insurance, and Freight (CIF) value doesn't exceed 50,000 Euro. The CIF value is a comprehensive figure that includes the actual price of the car, shipping expenses, and insurance costs.
The agreement outlines a progressive reduction in taxes over a five year period, while in the second year of implementation, the duty will drop to 6 percent. By the third year, it will further decrease to 4 percent, and in the fourth year, it will be reduced to 2 percent. Finally, by the fifth year, the import duty on these vehicles will be completely eliminated, reaching 0 percent. Also, the annual quota for these cars is slated to increase to 4 lakh units by the 10th year. It's important to note that if exports exceed this designated quota, the additional vehicles will be subject to taxes under the Most Favored Nation (MFN) rules.
Taxation Policy for Luxury and High End Vehicles
The trade deal also addresses the luxury vehicle segment. For cars with a CIF value exceeding 50,000 Euro, the initial quota based concessions won't apply. However, a long term relief plan has been structured for these high end Indian vehicles. In the first year, these cars will also be subject to an 8 percent duty. This tax will be gradually phased out over a decade, eventually reaching 0 percent by the 10th year. This strategic reduction ensures that premium Indian automotive brands will also find a sustainable and competitive path into the European luxury car market over time.
New Framework for Electric and Plug in Hybrid Vehicles
Recognizing the global shift towards sustainable mobility, the European Union has created a distinct quota system for Battery Electric Vehicles (BEV) and Plug in Hybrid Electric Vehicles (PHEV). For electric vehicles priced up to 40,000 Euro, the duty concessions will commence from the 5th year of the agreement. At that stage, a quota of 27,500 vehicles will be allowed at an 8 percent duty rate. This quota is designed to expand Importantly, reaching 1 lakh 25 thousand vehicles by the 14th year. For electric vehicles priced between 40,000 Euro and 60,000 Euro, a quota of 16,250 units has been set for the 5th year. For the most premium electric cars priced above 60,000 Euro, the 5th year quota is fixed at 6,250 units. By the 9th year, the duties on these specific categories are scheduled to be completely removed, fostering a green trade corridor.
Expansion into Agricultural and Dairy Sectors
The scope of the India EU FTA extends far beyond the automotive industry, promising substantial benefits for Indian farmers and the food processing sector. The draft agreement includes significant concessions for various agricultural products, including Indian grapes, dried onions, cucumbers, and rum produced from jaggery. A notable highlight is the provision for Indian dairy products, specifically ghee. The European Union has allocated an annual quota of 1,000 metric tons for Indian ghee. Under this quota, Indian exporters will receive a massive 50 percent discount on the base rate of customs duty. This move is expected to trigger a surge in demand for Indian dairy and agricultural goods across Europe, providing a direct boost to rural incomes and the processing industry. As the official implementation nears, both automobile manufacturers and the farming community are poised to capitalize on this historic opportunity to increase India's global trade footprint.