India is working on a new electric vehicle policy that would slash import taxes for automakers that commit to some local manufacturing, following a proposal by Tesla which is considering entering the domestic market, people with direct knowledge said. 

The policy being considered could allow automakers to import fully-built EVs into India at a reduced tax as low as 15 per cent, compared to the current 100 per cent that applies to cars which cost above US$40,000 and 70 per cent for the rest, said two of the sources, including a senior Indian government official. 

Tesla’s best-selling Model Y, for example, starts at US$47,740 in the US before tax credits. 

“There is an understanding with Tesla’s proposal and government is showing interest,” said the official, who is familiar with the issue. 

India’s commerce ministry, which is working on the plan, and Tesla, did not respond to requests for comment. 

Asked about the move, Finance Minister Nirmala Sitharaman told reporters “there is no proposal in front of me” to reduce import duties on electric vehicles. 

If such a policy is adopted, it could amount to a drastic reduction in the cost of imported EVs that local carmakers have been keen to avoid. It could also open the door for global automakers, beyond Tesla, to tap the world’s third-largest car market where sales of EVs are less than 2 per cent of total car sales, but growing rapidly. 

The lower import taxes could help Tesla sell its full range of models in India, and not just the new car it wants to make locally, said a third source. 

Shares of Tata Motors, India’s largest electric car manufacturer, fell nearly 3 per cent on the Reuters report, while rival Mahindra and Mahindra dropped over 2 per cent, dragging the benchmark auto index to an intra-day low with losses of 1.1 per cent. 

New Delhi is going to move slowly in considering the policy proposal as any lowering of taxes on imported EVs could disrupt the market and upset local players like Tata and Mahindra that are investing to build electric cars at home, the Indian official said. 

“This is going to go through a lot of deliberations even though government is keen on getting Tesla. That’s because of the impact on domestic players,” said the official. 

The policy is still in the initial stages of deliberation and the final tax rate could change, two of the sources said.