In this week’s newsletter, we talk about Tesla’s interest in India, why foreign investors withdrew their investments from the Indian stock market, the cost of elections and more.
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And now back to our stories for the day—
Can India recharge Tesla?
Last week, Elon Musk opened up about Tesla pulling into India during an X space. He said it’s a “natural progression” for Tesla to enter India, with the country now becoming the most populous nation in the world.
Seems like Musk wants to capitalise on India’s growing population.
It makes sense too. Tesla’s business has been slowing down in recent quarters.
The company’s annual car sales have dipped, and profits were down 40% in the December quarter compared to the previous year. The stock price has crashed 30% since the beginning of the year, leaving investors in a state of frenzy.
Clearly, entering new markets could help Tesla recharge its business.
But why did Tesla not enter the Indian markets before?
Well, one reason could be that the Indian government imposes a very high tax on foreign EV makers when they try to sell cars in India. Every time Tesla or any other EV maker brings a car to India for sale, they have to pay 70-100% of its cost to the Indian government.
This tax is called import duty.
The government has been justifying the high import duty, claiming that it is in place to protect the upcoming domestic EV players from disruption. However, foreign EV manufacturers have been lobbying the government to reconsider the taxes, saying their entry would give consumers more choices and make India’s EV ecosystem more robust and vibrant.
And it seems like the government has given in to their whims! It has recently announced a new EV policy that would lower import duties, which could make way for EV makers like Tesla in India.
Here is a breakdown of the new policy in broad terms–
EV makers would be allowed to sell up to 8,000 cars every year in India at 15% import duty if–
- They invest a minimum of $500 million in India, which translates to a little over ₹4,150 crores
- Set up a manufacturing facility in the country within three years from the time they start selling the cars, and
- These factories locally source 25% of the components they use
Also, the price of the EV has to be higher than $35,000.
And this is actually a sweet spot for Tesla! Its most economical car, the Tesla Model 3, starts from $38,990.
Now, this cut in import duties might not be a coincidence. As we already said, Tesla has been lobbying for a lower import duty for the past four years. In return, it had promised to invest a huge amount in India.
And now that the policy is in place, the company seems to have started manufacturing for the Indian markets in its Berlin factory. These cars are just like the US models; the only difference is that they are right-hand-driven vehicles instead of left.
Tesla is also scouting locations to invest up to $3 billion in India to start its manufacturing factory. If its existing factories out of the US are any indication, it is expected that the company would make one big concentrated investment and open a Gigafactory, just like it did in Germany and China.
However, the question remains―Can cruising into India bring a screeching halt to Tesla’s business slowdown?
Maybe not.
Despite the vast population getting Elon Musk jumping for joy, India has lower-than-expected car sales.
In 2023, around 4.1 million cars were sold in India, out of which less than 2% were EVs. Compare this to China, a country with a similar population size, and you’ll see that around 30.1 million cars were sold in the country in 2023, out of which around 34% were EVs.
The lower EV penetration in India can be attributed to the dismal state of the charging infrastructure.
The charging infrastructure in India is scattered and lacks standardisation. Each EV maker has built its own network, but there is no interoperability.
For example, you might be unable to charge a Nissan car at a Tata charging station as their charger plug and voltage requirements differ.
The lack of standardisation and interoperability means Tesla must invest heavily in building a charging network for its cars from the ground up.
Secondly, Musk’s cars are expensive, and Indians don’t buy a lot of high-end cars. His cars start from $38,990 and go up to $ 1,19,990. That is between ₹32 lakh and up to ₹1 crore! Luxury vehicles make up less than 2% of all the cars sold in India, which comes slightly north of 45,000 units sold in a year.
And it is not like Tesla has a low-cost model in the pipeline that it could introduce in India. The company had been working on a prototype, but it ultimately scrapped the plan due to a lack of progress. So, it needs to look out for their Chinese counterparts.
You see, this new policy allows imports from any country, including China.
And unlike Tesla, Chinese automakers like BYD and Xiaomi offer a wide range of products, from high-end to affordable. They could start setting up manufacturing facilities in India and flood Indian roads with affordable EVs, giving Tesla stiff competition.
BYD already has skin in the game. It has been operating in India since 2007 and has a joint venture with privately held Indian company Megha Engineering. This means it could be relatively easier for BYD to ramp up the distribution and sourcing of materials.
Now, you could argue — but hey, just like Tesla, BYD would also have to deal with India’s dismal charging infrastructure, right?
Yes, but it has a solution for that.
BYD not only sells pure EVs but also sells hybrid cars. And this gives the company an edge over Tesla.
Tesla has also been facing these Chinese OEMs in the mainland and has tried to lure customers with heavy discounts. But the strategy does not seem to be working, and their sales have dipped around 20% this year.
Clearly, Tesla’s entry into India might not be smooth sailing.
But all is not lost. India can certainly be an integral part of Tesla’s supply chain. A gigafactory in India can help it ramp up exports to the Middle East, South East Asia, and Australia. It can also be a critical part of the “China+1” manufacturing policy to reduce reliance on China.
We’ll just have to wait and watch how it all pans out.
Why an India-Mauritius tax amendment triggered a stock market slide
Sensex and Nifty, India’s benchmark equity indices fell by over 1% on Friday.
Sure, that’s not much and it’s something that can happen on any given day. But experts are pointing out that Foreign Portfolio Investors (FPIs) had dumped nearly $1 billion worth of stocks that day. And that these folks are feeling pretty nervous.
Why did they chicken out, you ask?
Well, it’s not because they’re worried about the economic prospects of India. Instead, it might just be that they’re worried about a big tax bill coming their way.
See, India and Mauritius have a deal. It’s called the Double Taxation Avoidance Agreement (DTAA), and it says that investors from one country can operate in another without being taxed twice on the same income. So, if you’re a Mauritian investor making money from Indian stocks, you can skip paying taxes in India and do it in Mauritius.
But here’s the thing. Mauritius has almost no or low taxes. The country turned itself into a tax haven in the 1980s to diversify away from agriculture and attract foreign capital.
And here’s what happened as a result of the DTAA with India. People began to set up businesses in Mauritius to invest in Indian stocks. They would invest, make their profits and get away with a zero tax on the gains.
So by “treaty shopping” which is a term for when people set up shell companies or businesses just to exploit a favourable double taxation agreement, you could avoid paying taxes without breaking the law.
Meanwhile, India would’ve taxed the same kind of gains at 10%.
And the end result was that money poured into India via Mauritius. It was the country’s second largest source of FPI flows into India in 2017.
But the Indian government was watching. It realised that it was losing a lot of tax revenue due to this practice. Besides, even when Indian tax authorities initiated tax disputes, courts mostly never ruled in their favour because the DTAA protected investors.
So the government tweaked the rules. It said that if a Mauritian entity sold shares acquired in India, they wouldn’t get the tax exemptions anymore. They’d have to pay taxes in India for transactions starting from 1st April 2017.
Sure, entities selling shares acquired before this period were still protected by the DTAA as long as they had proof to show that they were genuine Mauritian resident entities. But even then, there was a huge drop in inflows from Mauritius after that. The country has fallen to become the fourth largest source of foreign direct investments (FDI) inflows into India today, from being at the top of the list in FY17.
Now you’d think that this was enough for the government. But, no.
Last week, a new amendment to the DTAA sort of erased this exemption too. It said “Hey, if you’re a Mauritian entity who’s invested in India before the cutoff date and want to enjoy paying lower taxes, you’ll have to pass a Principal Purpose Test (PPT).”
Wait… what’s that?
Well, it’s simply a test to understand an entity’s intention behind choosing Mauritius as its operational base. It’s also something the OECD (Organisation for Economic Co-operation and Development) framework calls for. This is an international framework that aims to have minimum tax standards for all the member countries. And since Mauritius is a member too it wants to make sure that it adheres to these guidelines.
So in effect, it must convince the Indian tax authorities that it isn’t a mere shell company that has been operating from Mauritius and routing its Indian investments from there just for the tax benefits. If they can win them over, then they can keep paying zero taxes on their past investments. If not, they may lose that privilege.
To make things worse, it could even mean a tax on past transactions too. And you can be sure that investors won’t like that.
But things are still hazy and it’s hard to tell if that’s what the new amendment aims to do since it hasn’t become an enforceable Income Tax law yet.
But at the end of it all, you’re probably wondering ― Why would a country like Mauritius suddenly become so rigid with its tax treaties? Won’t foreign companies flee Mauritius then?
Well, the thing is that companies have been fleeing Mauritius for a while now. And that’s because it was getting a lot of global attention because of its ‘tax haven’ image.
The European Commission had added Mauritius to its list of countries that had to be closely watched for money laundering and terrorism financing. And the FATF (Financial Action Task Force), an inter-governmental body that sets anti-money laundering standards, placed the island under increased scrutiny because it felt that Mauritius had strategic deficiencies in its financial regulations.
All of that forced most US and European banks to leave the island country, simply because they didn’t want to attract scrutiny due to Mauritius’ shady image.
Ever since then, Mauritius has only wanted to prove the world wrong. It wants to wipe out the bad name associated with being a tax haven by overhauling its old tax laws. And let’s just say that the India-Mauritius tax treaty amendment could be part of the cleanup too.
But what will be the final outcome of this amendment, and will it spook the foreign investors even more?
Only time will tell.
Infographic 
: The Cost of Elections
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