ENHANCEMENT OF 1+YEAR ON EV BATTERIES

ENHANCEMENT OF 1+YEAR ON EV BATTERIES

Union Budget 2026 has extended the concessional Basic Customs Duty (BCD) on capital goods imported for manufacturing lithium-ion cells by at least one additional year beyond the previous 31 March sunset date. This "1+ year enhancement" lowers the landed cost of gigafactory plant and machinery, directly improving project economics for PLI-ACC (Production-Linked Incentive for Advanced Chemistry Cells) awardees. GST on EV batteries holds steady at 5%, and Section 80EEB interest deduction survives — but only for buyers who opt into the old tax regime for FY 2026-27 / AY 2027-28. What follows is the full policy picture, with numbers you can run through your own models today.

What the 1+ Year Enhancement Actually Covers

The concessional BCD on specified capital goods for lithium-ion cell manufacturing was first introduced through a Customs exemption notification operationalised via Finance Act 2023. Each successive budget has extended the sunset rather than allowed it to lapse, and Budget 2026 continues that pattern with a minimum one-year extension — taking the benefit window beyond 31 March 2026.

The goods covered are specified in the relevant Customs Tariff exemption entry and broadly include:

• Cell formation and activation equipment — charge-discharge cycling machines used at the end of cell assembly
• Electrode coating and calendering machines — for anode/cathode slurry deposition and compaction
• Dry-room HVAC and humidity control systems — critical because lithium reacts with moisture above trace levels
• Electrolyte filling and vacuum sealing machinery
• Testing and quality assurance equipment linked to battery cell grading

Not everything in your project cost estimate qualifies. Civil construction, land, vehicles, and general-purpose IT infrastructure are excluded. Your project team must map each import line to the specific HS codes listed in the exemption notification before filing the Bill of Entry at the port. A mismatch at classification stage means the standard rate applies and recovering the duty differential post-clearance is a protracted adjudication process.

The concessional rate for qualifying capital goods is Nil BCD, compared to the standard BCD rate of 7.5% that applies to most capital goods not covered by a specific exemption. Social Welfare Surcharge (SWS), levied at 10% of BCD, also drops to zero when BCD is Nil — making the saving compound across both levies.

The PLI-ACC Scheme: Policy Stack That Makes This Work

PLI-ACC, administered by the Ministry of Heavy Industries, targets domestic manufacturing of 50 GWh of advanced chemistry cell capacity with a total incentive outlay of approximately Rs. 18,100 crore over five years. Incentives are paid on net incremental sales of qualifying cells, with the incentive rate front-loaded in earlier tranches to encourage faster commissioning.

The scheme operates under a "double lock" structure: you must hit both a minimum installed capacity threshold and a minimum sales volume in each review year to claim the incentive. Importing capital goods at zero BCD directly improves three project metrics simultaneously:

1. Lower capex → lower debt quantum → lower interest burden → better Debt Service Coverage Ratio (DSCR)
2. Faster payback → the BCD saving drops straight to equity IRR since the saving is a one-time capex reduction
3. Stronger bid competitiveness in future PLI tranches or offtake negotiations with OEMs

The 1+ year extension matters particularly because PLI-ACC awardees are in various stages of civil construction and equipment delivery. A company that signed its capacity commitment in 2024 but whose equipment delivery timeline stretches to late 2026 or 2027 would have been stranded at the old sunset. The extension plugs that gap.

FAME-III (Faster Adoption and Manufacturing of Electric Vehicles — Phase III), which succeeds FAME-II that ended in March 2024, adds another layer: cells manufactured domestically using qualifying equipment are eligible for a higher demand incentive under FAME-III than cells sourced from imports. This creates a downstream revenue premium on top of the upstream capex saving — a policy design that is deliberately stacking incentives to shift manufacturing geography.

Worked Example: How BCD Savings Change a Gigafactory's Numbers

Consider a mid-scale gigafactory with an installed capacity target of 5 GWh (a typical single-tranche PLI-ACC commitment). Its equipment import programme looks approximately like this:

Under the concessional notification, BCD = Nil, SWS = Nil (SWS is calculated on BCD; if BCD is zero, SWS is zero). Total saving: Rs. 41.26 crore on Rs. 500 crore of imports.

IGST (typically 18% on capital goods) is still payable on import — but it is fully available as Input Tax Credit (ITC) against the company's GST output liability on cell sales. It is a cash-flow timing cost, not a permanent cost. The Rs. 41.26 crore BCD+SWS saving, by contrast, is a hard rupee saving that flows directly to equity IRR.

At a project level, equity IRR on a Rs. 2,000 crore gigafactory project (debt-equity 70:30, meaning equity of Rs. 600 crore) improves by roughly 6-7 percentage points when the BCD window covers the full equipment import programme versus a scenario where it lapses mid-import. That is the difference between a bankable and an unbankable project for most infrastructure investors.

The lesson for project sponsors: sequence your equipment imports to front-load qualifying items before any future sunset, and pre-file classification opinions with CBIC before your first shipment — not after.

GST on EV Batteries: The 5% Rate and Inverted Duty Structure

The GST Council's June 2022 decision to reduce GST on lithium-ion batteries (whether standalone or as part of an EV pack) from 18% to 5% was a structural correction, not a temporary concession. It brought battery GST in line with EV GST (also 5%), ending the inverted duty structure that had previously trapped large ITC refund claims with battery manufacturers.

What the 5%-5% parity means in practice:

• A cell manufacturer selling cells to a battery pack assembler charges 5% GST. The assembler charges 5% GST on the pack sold to an OEM. The OEM charges 5% GST on the vehicle to the dealer. There is no accumulation of credit at any stage that cannot be utilised against output tax. The refund queue that choked working capital under the old 18% input / 5% output structure is gone.
• Battery swapping operators and Battery-as-a-Service (BaaS) companies occupy a different position. The GST treatment of a swap transaction — whether it is a service (taxable at the service rate) or a supply of goods (batteries) — depends on contract structure. CBIC has issued clarifications but the position continues to evolve. If you are pricing a BaaS subscription, verify the current GST classification with reference to the latest CBIC circular before locking your subscription price. Getting this wrong means either a margin shortfall (if you under-collect) or a customer dispute (if you retrospectively raise a supplementary invoice).
• Second-life battery applications — repurposing EV packs for stationary storage — may attract a different GST classification depending on whether the battery is sold, leased, or embedded in an energy storage system. Get a written tax opinion before your product launch.

For EV OEMs sourcing Indian-manufactured cells, the GST chain from cell to vehicle is clean and credit-neutral. This is one more reason why the BCD concession + 5% GST stack together as a coherent policy architecture rather than isolated measures.

Income-Tax Landscape for Cell Manufacturers in FY 2026-27

Section 115BAB: Concessional Rate for New Manufacturing Companies

New domestic manufacturing companies incorporated on or after 1 October 2019 and commencing production within the notified sunset date can opt for a 15% concessional corporate tax rate under Section 115BAB of the Income-tax Act, 1961 (plus applicable surcharge and cess, bringing the effective rate to approximately 17.01%). This compares with the standard 22% concessional rate under Section 115BAA for existing companies, or the normal 30% rate.

Critical requirement: Once you opt into Section 115BAB, you cannot claim most other deductions — including Section 80-IC, 80-IE, or investment-linked deductions under Section 35AD. You also cannot carry forward losses from years under a normal rate structure into the 115BAB regime. The SPV (Special Purpose Vehicle) structure for your gigafactory must be designed before incorporation, not retrofitted.

Verify the current commencement sunset as extended by Finance Act 2026. If your manufacturing operations commence after the applicable date, Section 115BAB does not apply regardless of when you incorporated.

Section 35AD: Capital Expenditure Deduction

If you are outside Section 115BAB, Section 35AD of the Income-tax Act allows a 100% deduction in the year of expenditure on capital expenditure for specified businesses — which includes the business of setting up and operating a cold chain facility or warehousing facility, among others. Whether a gigafactory qualifies under a specified category requires a careful reading of the applicable sub-section and any notifications. Do not assume eligibility; get a written opinion in the year before commissioning.

R&D Deductions Under Section 35

Section 35(1)(i) and 35(2AB) provide enhanced deductions for in-house scientific research. For manufacturing companies engaged in R&D on cell chemistry, electrode materials, or battery management systems, a 100% (or, if the weighted deduction provisions are reinstated, more) deduction on qualifying R&D expenditure can materially reduce tax liability. The Department of Scientific and Industrial Research (DSIR) recognition and annual reporting requirements must be maintained or the deduction is disallowed.

Section 80EEB: Should You Still Buy That EV Under the Old Tax Regime?

Section 80EEB of the Income-tax Act allows individual taxpayers a deduction of up to Rs. 1,50,000 per year on interest paid on a loan taken for the purchase of an electric vehicle. The deduction applies to loans sanctioned by a financial institution between 1 April 2019 and 31 March 2023.

For FY 2026-27 / AY 2027-28, Section 80EEB operates as follows:

• If your qualifying EV loan was sanctioned on or before 31 March 2023, you can continue claiming the deduction each year for the life of the loan — subject to the Rs. 1,50,000 annual cap on interest actually paid.
• The deduction is not available under the new tax regime (Section 115BAC), which is the default regime for individuals from FY 2023-24 onward.
• No new EV loans sanctioned after 31 March 2023 qualify, unless Parliament enacts an extension — which has not occurred as of Budget 2026. The deduction is not available for new buyers who take a loan today.

Worked Example: Old vs New Regime for an Existing EV Loan

Suppose you took a loan of Rs. 20 lakh in December 2022 at 9% per annum for an electric car. In FY 2026-27, your interest outflow is approximately Rs. 1,44,000 (loan partially repaid; outstanding around Rs. 16 lakh).

*New regime rates are lower (0%, 5%, 10%, 15%, 20%, 30% slabs) and the new regime often wins at higher incomes because the rate structure is more compressed. In this illustration, the new regime saves Rs. 37,440 despite forgoing the 80EEB deduction.

The takeaway: Do not assume the old regime is better just because you have a qualifying EV loan. Run a full comparison including all your deductions (80C, 80D, HRA, housing loan interest) against the new regime rates. For most salaried individuals with limited deductions beyond 80C, the new regime may still yield a lower tax output even without 80EEB.

Common Mistakes and Pitfalls to Avoid

1. Mis-classifying equipment at the port of entry

The concessional BCD notification lists specific HS codes. Importers who file a Bill of Entry under a wrong heading — either because the equipment is a multi-function machine that straddles two headings, or because the supplier's invoice description differs from the Indian tariff classification — end up paying standard BCD and litigating a refund. Conduct a pre-import HS code opinion from a licensed Customs House Agent with CBIC representation experience, not just the equipment supplier's classification used in their home country.

2. Assuming all project capex qualifies

Civil works, air-conditioning for non-dry-room areas, canteen equipment, office IT, and vehicles do not qualify for the concessional notification. Many project cost controllers roll up total plant spend and calculate a blended BCD saving — which overstates the benefit and leads to budget variances at financial close. Create a line-by-line eligibility matrix before finalising your project finance model.

3. Missing the GST registration timing for ITC on imports

IGST paid on import is ITC — but only if you are GST-registered at the time of import. A company that starts importing before obtaining GSTIN (which sometimes happens when civil work runs ahead of regulatory timelines) loses the IGST ITC permanently on those imports. Apply for GSTIN as soon as your entity is incorporated and before your first equipment order is confirmed.

4. Structuring the SPV after operations begin

Section 115BAB requires the company to be incorporated after 1 October 2019 and to not have been formed by splitting up or reconstructing an existing business. If a promoter group shifts equipment or personnel from an existing entity into the new SPV, CBDT may treat it as a reconstruction and deny the 15% rate. This determination must be made at the term sheet stage of a project, not at the first tax return filing.

5. Claiming 80EEB deduction under the new tax regime

This is a filing error that generates a notice under Section 143(1)(a). If you have opted for the new regime (voluntarily or by default), do not claim 80EEB in your ITR. The system will flag it.

Key Takeaways

• The Union Budget 2026 has extended the Nil BCD on qualifying capital goods for lithium-ion cell manufacturing by at least one additional year, preventing a lapse that would have stranded mid-project importers.
• On a Rs. 500 crore equipment programme, the BCD + SWS saving under the concessional notification is approximately Rs. 41 crore — money that flows directly to equity IRR and can be the difference between bankable and sub-threshold project returns.
• GST on EV batteries is 5%, matching the EV rate and eliminating the inverted duty structure. Battery swapping and BaaS GST classification continues to evolve; verify before pricing.
• PLI-ACC awardees should front-load qualifying equipment imports within the extended window and pre-file HS code classification opinions to avoid duty disputes at port.
• Section 80EEB is available only under the old tax regime and only for loans sanctioned by 31 March 2023 — new buyers taking an EV loan today have no Section 80EEB benefit regardless of regime choice.
• Cell manufacturer SPVs evaluating Section 115BAB must resolve regime choice before incorporation; retrofitting the structure post-commencement is not permitted and risks denial of the concessional rate.
• The Budget 2026 extension, FAME-III demand incentives, and 5% GST together form a deliberately stacked policy architecture. Stakeholders who map all three layers into their financial model will price and bid more accurately than those who assess each incentive in isolation.