An Urgent Need for a Comprehensive Environmental Tax Policy in India – Evaluating the Tax Deduction Proposal for Electric Vehicles


A distinctive fiscal measure undertaken in the Indian Union Budget (announced in July 2019) as regards the protection of environment was the incentive for purchase of electric vehicles by way of introducing a deduction in the Income Tax Act, 1961. With effect from April 2020, the proposed provision shall provide a deduction of interest on loans taken by an individual taxpayer (sanctioned between 2019 and 2023) for purchase of an electrical vehicle. The amount of deduction so allowed is capped at one lakh fifty thousand rupees. Concurrently, it was reported that a rate reduction for purchase of electric vehicles by individual consumers would soon be introduced, thus reducing the overall tax burden of consumers (as of the date this note was last reviewed, this rate change was yet to be notified in accordance with the prescribed method). In this note, the author evaluates the effectiveness of this proposed deduction in encouraging consumption of energy-efficient goods. It is submitted that there is an urgent necessity to dedicate an exclusive fiscal policy in the design of fiscal instruments that are intended to promote sustainable development and the reduction of carbon emissions.