From Power to Price: New EV Tax Closes One Loophole but Opens Several Others

The government's decision to overhaul the way electric vehicles (EVs) are taxed has triggered a fresh wave of doubts, with many in the trade warning that the cure may prove worse than the disease. Through the budget for the coming fiscal year 2083/84, the government has moved to assess EV taxes on the basis of the vehicle's price rather than, as before, the motor's peak power. The shift was meant to plug leakage — but on closer examination, it threatens to invite tax evasion, under-invoicing, hundi transactions and a new round of audit disputes.

The reason for abandoning the old system is itself instructive. When tax was pegged to motor capacity, importers were suspected of misdeclaring it — passing off EVs with motors above 100 kilowatts as machines below that threshold to fall into a lower tax slab. The Office of the Auditor General had levelled precisely this charge, alleging that traders understated capacity to evade duty. Compounding the problem, the government does not even possess the equipment to physically verify a motor's power rating. It was against this backdrop that Finance Minister Dr. Swarnim Wagle scrapped the capacity-based method altogether and switched to value.

Yet changing the yardstick does not remove the underlying weakness — and this is the crux of the matter. Both the old system and the new one ultimately rest on figures supplied by the very importers and agencies the government distrusts. Earlier the disputed number was motor capacity; now it is the invoice value. The reform has not eliminated the reliance on unverifiable, trader-supplied data; it has merely swapped one contestable variable for another, arguably more slippery, one.

The first risk the price-based model opens up is under-invoicing. Because the tax now tracks the declared value, an importer has a direct incentive to collude with the overseas supplier and have the EV billed below its true price. The lower the invoice, the lower the duty — a temptation built into the design itself.

But under-invoicing does not end the story, because the foreign parent company must still be paid the vehicle's full value. To bridge the gap, importers are likely to fall back on hundi, the informal money-transfer channel that bypasses the banking system. Consider a trader buying a car worth USD 20,000 abroad. He has the seller issue an invoice for only USD 15,000, remits that amount through formal channels, and arranges the remaining USD 5,000 separately — settling it abroad while squaring the equivalent sum inside Nepal through hundi. The result is a transaction that both deprives the state of revenue and pushes hard currency out of the formal economy and into illegal channels.

The second, and perhaps more striking, vulnerability is the system's exposure to exchange-rate swings. Since EVs are imported from countries such as China, and since the tax is now anchored to the rupee value of the vehicle, even ordinary movements in a foreign currency can produce wild swings in the duty payable. A worked example makes the danger vivid. Suppose an EV costs 2 lakh yuan. At an exchange rate of NPR 22 to the yuan, its price works out to Rs 44 lakh; at that value it falls in the Rs 40-50 lakh band, attracting 20 percent customs (Rs 8.8 lakh) and a 90 percent clean infrastructure fee (Rs 47.52 lakh) — a combined Rs 56.32 lakh in customs and infrastructure levies.

Now suppose that just a day later the yuan strengthens to NPR 25. The identical vehicle is now valued at Rs 50 lakh, which tips it into the top band of above Rs 50 lakh. There the customs duty becomes Rs 10 lakh and the infrastructure fee, charged at 130 percent, jumps to Rs 78 lakh — Rs 88 lakh in combined levies. The same car, from the same company, bought a single day apart, ends up carrying Rs 31.68 lakh more in tax. Were the yuan to weaken instead, the duty would fall by a similar magnitude.

What makes the jump so violent is that two forces compound. The currency appreciation alone inflates the rupee base, and that inflation simultaneously pushes the vehicle across a bracket threshold, where the infrastructure fee leaps from 90 to 130 percent. Because the slabs behave like cliffs rather than gentle slopes, a vehicle sitting near a boundary can see its tax bill lurch dramatically on the back of a routine exchange-rate move. The 22-to-25 swing used here is deliberately exaggerated to expose the mechanism, but even a modest currency shift near a threshold would produce an outsized distortion.

From there, the audit problem writes itself. If the same model is invoiced at Rs 50 lakh one day and Rs 44 lakh the next, it is hardly far-fetched to expect the Auditor General to suspect that the value was shaved to dodge tax. The government and the audit body are already prone to reading such fluctuations as manipulation. In other words, the very institution whose objections drove this change will now find fresh grounds for suspicion — flagging audit irregularities and reopening disputes. The reform risks relocating the quarrel from "capacity" to "price" rather than settling it.

There is a consumer dimension too. When the price of one model of one car can differ by Rs 31 to 32 lakh within a matter of days, how is a buyer expected to trust the sticker? Such volatility risks breeding distrust not just toward individual dealers but toward the EV market as a whole.

It returns, in the end, to the same unresolved gap. The government switched away from power-based taxation because it had no way to verify a motor's rating; but under the new regime it must instead judge whether an invoice reflects a vehicle's true worth — a task that is at least as difficult, and complicated further by the fact that prices legitimately move with the exchange rate. Without an independent valuation benchmark, such as reference prices, and a clear rule for handling currency fluctuation, the change looks set to multiply leakage, hundi, audit objections and disputes rather than curb them. The verdict, then, is that the system has changed; the problem has not.

The new EV tax structure (customs duty + clean infrastructure fee):

• Up to Rs 20 lakh: 20% customs + 2.5% infrastructure fee

• Rs 20-30 lakh: 20% customs + 20% infrastructure fee

• Rs 30-40 lakh: 20% customs + 35% infrastructure fee

• Rs 40-50 lakh: 20% customs + 90% infrastructure fee

• Above Rs 50 lakh: 20% customs + 130% infrastructure fee

Every EV except those in the lowest bracket additionally attracts a 5 percent road maintenance fee and 13 percent VAT.