The Central Board of Direct Taxes (CBDT) has expanded the scope of safe harbour rules by including lithium-ion batteries for electric and hybrid vehicles. The government has also raised the safe harbour threshold from Rs 200 crore to Rs 300 crore, a move that aims to reduce transfer pricing disputes related to imported electric vehicle (EV) components. The amendments will apply to assessment years 2025-26 and 2026-27.
CBDT issued a statement confirming that the amendments will provide tax certainty to businesses opting for the safe harbour regime. By including lithium-ion batteries under core auto components, the government seeks to encourage EV manufacturing and streamline taxation for companies dealing in these critical components. Industry experts have welcomed this decision, highlighting its potential to reduce litigation and bring more clarity to transfer pricing regulations.
Safe harbour rules are governed by Section 92CB of the Income-tax Act, 1961. These rules allow taxpayers to determine the arm’s length price for transactions between related parties, minimizing disputes with tax authorities. When an entity opts for safe harbour, the income tax department accepts its declared transfer price without further scrutiny. This mechanism is particularly important for multinational enterprises (MNEs) that engage in cross-border transactions within their group companies.
The amendments mark a significant step in India’s efforts to strengthen the EV ecosystem. With lithium-ion batteries playing a crucial role in electric mobility, the revised rules are expected to attract more investments in the sector. By offering a clear taxation framework, the government is encouraging both domestic and international players to scale up battery production and EV manufacturing. The move also aligns with India’s broader goal of reducing carbon emissions and promoting clean energy alternatives.
Businesses engaged in EV component imports have long faced challenges due to fluctuating transfer pricing norms. The inclusion of lithium-ion batteries under the safe harbour provision will help these companies avoid prolonged disputes with tax authorities. Additionally, raising the threshold to Rs 300 crore will provide relief to larger corporations engaged in high-value transactions. Experts believe that this change will create a more predictable tax environment, fostering growth in the automotive and renewable energy sectors.
The amendments also reflect the government’s commitment to aligning India’s tax policies with global best practices. Several countries offer safe harbour provisions to reduce tax-related conflicts and enhance compliance. By expanding the scope of these rules, India aims to enhance investor confidence and improve its ease of doing business ranking. The decision comes at a time when the EV market is witnessing rapid expansion, with major automakers ramping up production to meet growing demand.
Lithium-ion batteries constitute a major cost component in electric vehicles, and their pricing directly impacts the affordability of EVs. By providing a stable tax framework for these batteries, the government seeks to encourage more companies to set up manufacturing units in India. This move is in line with initiatives such as the Production Linked Incentive (PLI) scheme, which aims to boost local production of EV components and reduce reliance on imports.
The rise in the safe harbour threshold also benefits companies engaged in the production of hybrid and electric vehicles. By offering greater flexibility in pricing, the government is creating a more competitive environment for auto manufacturers. Industry leaders have expressed optimism that these changes will drive further investment and technological advancements in the EV sector.
While the amendments are expected to provide immediate relief to businesses, tax professionals advise companies to carefully assess their transfer pricing policies before opting for the safe harbour regime. They emphasize that while the provisions offer tax certainty, businesses must ensure compliance with all reporting requirements to avoid future disputes.
The government’s decision to revise the safe harbour rules comes amid growing emphasis on sustainable transportation. With rising fuel prices and environmental concerns pushing consumers towards electric vehicles, the move is seen as a strategic step to accelerate EV adoption. By reducing tax-related uncertainties, the amendments are likely to attract more investments in India’s clean energy future.
Industry analysts believe that the inclusion of lithium-ion batteries under safe harbour rules will also strengthen India’s position as a global manufacturing hub for EV components. With several multinational companies looking to shift supply chains away from traditional markets, India presents an attractive alternative with its growing EV ecosystem and supportive government policies. By offering tax certainty, the amendments may encourage companies to expand local production rather than relying on imports.
Additionally, the move is expected to benefit startups and smaller players in the EV supply chain. Many emerging companies in the electric mobility sector have struggled with compliance complexities related to transfer pricing. By streamlining taxation for lithium-ion batteries, the government is providing these businesses with a more predictable financial environment. This is crucial as India continues to push for faster EV adoption under various schemes, including Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME).
Apart from boosting investment, the amendments could have a long-term impact on battery technology innovation. With a clearer taxation framework, companies might be more willing to invest in research and development for better battery efficiency and performance. Industry experts argue that while the tax incentives are helpful, further policy support in the form of subsidies or infrastructure development will be necessary to ensure sustainable growth in the EV sector.
While the amendments are a step in the right direction, experts also caution that companies should continue to monitor global tax trends and evolving trade regulations. Safe harbour provisions offer relief, but businesses must ensure that their pricing structures align with broader economic policies. Given the fast-changing nature of the EV industry, regulatory bodies may introduce additional reforms to address new challenges.
For now, the expansion of safe harbour rules sends a positive signal to the industry. By recognizing the importance of lithium-ion batteries and raising the financial threshold, the government has demonstrated its commitment to fostering an investor-friendly environment. As the demand for electric vehicles grows, these measures are expected to contribute to a more stable and predictable market, encouraging both domestic and international companies to accelerate their EV-related investments in India.