Question:
According to the news article “Solar energy storage producers want lower GST levy
Batteries”: Develop a critical response for the following questions:
If all other things are equal, critically analyse the effect of lowering India’s Goods and Services Tax (GST), which is currently 28% to 5%.
Tip: Please analyse the market outcomes in terms of price and quantity.
Analyze the effect of lowering GST on batteries from 28% – 5% on the Electric Vehicle (EV), market in India.
Tip: A rechargeable battery is an input to an EV.
Consider the market impact in terms of profit, quantity, and price in the short- and long-term.
Analyse critically the effect of lowering GST on batteries from 28% – 5% on the petrol vehicle market in India.
Is the government’s push to become a 100 percent Electric Vehicle (EV), nation by 2030 more effective with the proposal to lower GST on solar energy storage companies’ batteries?
Is this a proposal that should be considered by the Minister of State (Independent charge) for Power, Coal, New & Renewable Energy
Answer:
Introduction
The study examines the effect of lowering India’s Goods and Services Tax (GST), which is currently at 28 percent to 5 per cent. It also analyzes the Indian battery market’s price, quantity, and surplus (Mishra 2017, 2017).
The study also evaluates the effect of the GST on India’s petrol and electric vehicle markets.
The essay paper also discusses the impact of the proposal to lower the GST on batteries on India’s goal of becoming a 100 percent electric nation by 2030.
The GST levied on batteries will be lowered from 28% to 5 percent, which will reduce the battery’s price.
The selling price of a batteries can be affected by the fact that consumers will have to pay less tax (Creedy 2016,).
If other factors like supply remain constant, a drop in price due to tax can lead to an increase in demand on the free market.
As shown in the figure above, a decrease in GST on batteries from P1 through P2 will also lower the cost of batteries.
The quantity of batteries required will rise from Q1 to Qu2.
The GST levy’s decline will have an impact on the battery market’s producer and consumer surplus.
The GST levy’s decline in price should result in a higher consumer surplus.
The product’s demand will rise in the meantime, as a result of falling prices.
According to Cowan (2012), this will result in a higher consumer surplus.
If other factors are constant, a lower price for batteries will decrease the producer surplus.
The price of batteries will always be lower if GST is reduced. This contributes to a lower producer surplus since the supply of goods will be decreased (Ma 2015).
The triangle of producer surplus will therefore be smaller, indicating a lower producer surplus.
The GST reduction on batteries will decrease the manufacturing cost of EVs, which will help EV producers reduce their vehicles’ prices.
The price drop in EVs will cause a rise in demand in the short-term (Balkyte & Tvaronavijiene, 2010).
Below is a diagram to help you understand the situation better:
The above diagram shows that a reduction in tax on battery will result in a decrease in price for EVs in the short-term.
The demand curve will remain at D, and there will not be any change in the supply in the short-term.
From Q1 to Q2, there will be an increase in demand for EV.
As a result, EV will see a rise in profitability since there is no change in the profit margin of the EV producers (Bochet.?lk.l?c. Moulin & Sethuraman 2012).
However, the rise in demand will cause a shift in the demand curve to the right from D to D1, while the supply will increase from S1 and S2 due to better resource utilisation (please refer to the diagram below).
Therefore, there will not be any changes in the price for Electric Vehicles.
The increase in EV consumption over the long-term will help EV producers to be more profitable (Balkyte & Tvaronavijiene, 2010).
Below is a diagram that will help you understand the concept better:
The price of petrol vehicles will be lower than electric ones if the GST rate is reduced from 28 percent to 5% on batteries.
Accordingly, a decrease in the price for EVs will have a direct impact on the demand for petrol vehicles in India (Bochet.?lk.l?c. Moulin & Puthuraman 2012).
Below is a diagram that illustrates the theory of demand.
The above diagram shows that a drop in the price for EVs from P1 to P1 will result in a decrease in demand for petrol vehicles Q to Q1.
The new Indian Government policy will have a significant impact on petrol vehicle sales.
While it may be possible to reduce the GST charged on batteries by solar energy storage companies, the proposal will help India’s plan to become a more EV-friendly country by 2030, although it is almost impossible to attain the goal of being 100 percent.
As prices drop, it is clear that the GST deduction on batteries will increase demand.
As the battery is a complementary product for an EV, this will result in a lower price for Electric Vehicles.
To reduce the cost of EVs in India, it will be beneficial to lower the GST on the complementary goods.
However, an EV can be used as a replacement product for a petrol-powered vehicle.
The increase in demand for EVs could have a negative effect on the market for petrol-powered vehicles.
The changing economic environment will make it clear that EVs are more desirable to be purchased by the targeted audience.
The government’s goal to become a 100 percent electric nation by 2030 will be supported.
Some factors, such as the lack of electric charging stations in rural areas, may affect whether EVs are purchased by all.
The Minister of State for Power, Coal, and New & Renewable Energy should, in the meantime, consider the economic and environmental benefits of lowering the GST levy on battery.
Conclusion
The above analysis shows that the GST rate for battery will decrease, which will increase Indian demand.
It is difficult, however, to reach the goal of 100 percent electric nation by 2030 because of a lack of infrastructure and innovation in the petrol vehicle sector.
It is also important to remember that the price drop in battery will not reduce the cost per petrol vehicle.
The Indian Government will be able to reach a higher target with the 5 percent GST policy, as opposed to the 28 per cent GST rate.
Refer to
Perception of competitiveness within the context of sustainable growth: Facets and definitions of “sustainable competiveness”.
Journal Of Business Economics And Management 11(2): 341-365.
Balance of supply and demand within bilateral constraints.
Theoretical Economics 7(3), 395-423.
Third-Degree Price Discrimination, and Consumer Surplus.
The Journal Of Industrial Economics, 60(2): 333-345.
Fourth edition. Measuring tax burdens and welfare changes (4th ed.).
Economics (6th edition).
Long-Run Industry Supply Curves and Producer Surplus.
Journal Of Economics And Development Studies 3(2).
Manufacturers of solar energy storage want a lower GST levy for batteries.
The Hindu Business Line.
Economics (5th edition).
Chantilly (VA): Teaching Co.