Mint Explainer | Why is China challenging India’s EV incentives at the WTO?

The move comes as India’s clean mobility ecosystem gains traction through government incentives worth over ₹65,000 crore, spanning consumer subsidies and production-linked incentives (PLIs). Here’s a look at what China’s complaint is about, how India’s EV sector has evolved, and what happens next at the WTO.

What are China’s concerns?

China made more than 70% of the world’s EVs in 2024, including 12.4 million electric cars, according to the International Energy Agency (IEA). The global EV outlook report also said China was the force to reckon with in EV exports, with a 40% share. In essence, the world’s biggest EV ecosystem has everything to lose.

India, on the other hand, has gradually made headway into the sector. EV sales in the country rose about 17% in FY25 from the last fiscal year, topping 1.9 million units compared to the 1.6 million in FY24, according to the central government’s vehicle registry Vahan.

On 15 October, China alleged that India’s public policy related to giving incentives for manufacturing EVs and subsidies to reduce consumers’ burden to buy pricier EVs violates the clause around national treatment.

What is ‘national treatment’ under the WTO?

To answer this, we need to understand the General Agreement on Tariffs and Trade (GATT). The GATT was a post-World War II agreement among most nations governing international trade.

It created a principle of national treatment, wherein nations cannot treat imported products less favourably than domestically made products. If imported products have cleared customs, they cannot be treated differently from indigenous products.

National treatment is now a key component of not only global economic trade but also of most bilateral and free trade agreements.

The GATT was re-ratified in 1994 through multiple long trade discussions, and led to the creation of the WTO as an implementing agency in 1995.

How have national treatment disputes played out?

It all starts with a nation raising an issue – just like China has raised one this time. The WTO’s dispute resolution board takes up the issue once it is raised, and the country against whom it is raised also has to submit its reasoning.

But the debate begins much before this point, with countries often refuting that the imported product is not a “like” product. For instance, if country A’s alcohol is taxed extra after customs and it raises an issue, the importing country B often starts disputing the claim from the get-go, citing that the foreign liquor is not a “like” or directly competitive product. But it does not always work.

Take the example of Japan. In a 1996 challenge to Japan’s liquor tax law, Western countries such as Canada, the EU, and the US alleged that imported alcohols were being taxed at a higher rate than local brews. A ‘shochu’, they alleged, was being sold at lower taxes than imported vodka, for example.

The WTO then ruled that Japan’s taxation system was unfair towards imported drinks, and that they were indeed in competition with ‘shochu’, and they were substitutes for each other.

What happens to the EV policy issue now?

It remains to be seen. However, we know that the key issue will be assessing whether Chinese EVs are directly competitive with those made in India, and whether the WTO believes that India’s public policy gives preferential treatment to domestically made goods

In 2015, the world’s most populous country decided to nudge consumers towards purchasing EVs. These zero-emission vehicles are typically about 20-50% more expensive than fossil fuel cars, with the differential between luxury models being even wider.

So, the government created the FAME scheme – Faster Adoption and Manufacturing of Electric (& Hybrid) vehicles – with a ₹895 crore outlay. The scheme mandated automakers to sell EVs at a discount to consumers, which the government would reimburse later.

In 2019, the FAME scheme was renewed for a second iteration with a massive ₹10,000 crore outlay. Along with this, the government also reduced the goods and services tax on EVs to 5%, significantly lower than the 28% + cess levy on other fossil fuel vehicles.

In September this year, the government revamped the goods and services tax regime to boost consumption, but the tax on EVs remained 5%, while the levy on other vehicles was reduced significantly.

The government also launched PLI schemes to boost the supply of EVs and batteries in India. In May 2021, the government launched a ₹18,100 kickback package to get private players to develop 50 GWh of battery capacity called the PLI for Advanced Chemistry Cells (PLI-ACC).

It also created a ₹25,938-crore incentive plan for automakers to make EVs in India called the PLI for automakers and auto parts (PLI-Auto).

The government also allocated ₹10,900 crore for the continuation of the FAME scheme, renamed the PM E-Drive scheme in its third iteration in FY25. The scheme is set to run till FY28.

All these schemes, except the tax law, have a strict localisation mandate – only those products with substantial value addition in India would qualify for these benefits.

How happens next at the WTO?

It starts with a nation raising a request for consultations. This is what China has done at this stage. The Chinese Communist Party-ruled nation has called India to the negotiation table, in an effort to address the issue and settle it bilaterally.

If these negotiations do not end in 60 days, the WTO’s dispute resolution board sets up a panel of experts. This panel, over a period of six months, takes written and oral evidence from the parties, and publishes a draft report. Both sides can send recommendations on the draft report, and the WTO adjudicators then create a final report which is binding on the parties.

But just like in any judicial process, there is room for appeals. The WTO also has an appellate body to listen to challenges to the dispute resolution board’s final report. However, this body is defunct, as members’ terms expired in 2020.

To fill this gap, a group of nations, including the EU, China, Brazil, and Canada, formed an interim appeals mechanism called the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) in 2020.

“India’s defence is likely to be that these schemes do not violate Article III (national treatment), because one of the schemes China has raised objections against is the Scheme to Promote the Manufacturing of Electric Passenger Cars in India (SPMEPCI), which invites foreign carmakers to make in India,” said Divya Mittal, professor of international economic law at ILS Law College, Pune.

Since foreign automakers are incentivised to set up production in India, the arguments of violation of national treatment are weakened, Mittal added.