How Tesla Structured a Tax Efficient Manufacturing Investment Strategy in India

Tesla Inc. entered India early in the year by opening an office in Bengaluru, Karnataka, and registering its subsidiary, Tesla India Motors and Energy Pvt. Ltd.

Tesla chose to route its manufacturing investment into India via the Netherlands, a tax-friendly jurisdiction. This allows the company to avail benefits on capital gains and dividend payments. Besides, this route will allow Tesla to easily import its latest intellectual property / technology from its Dutch subsidiary to India.

Subsidiary details

Tesla registered itself as an unlisted private company in Bengaluru, Karnataka, on January 8, 2021, having three directors, with an authorized capital of INR 1,500,000 (US$ 20,568) and paid-up capital of INR 100,000 (US$1,371).

It has been incorporated as the subsidiary of the Netherlands-based Tesla Motors Amsterdam, which itself is a subsidiary of the California-based Tesla Inc.

Nature of Business

The exact nature of the company’s business is unknown, although it may be understood that Tesla will first foray into sales and then move onto assembly and manufacturing based on the market response.

Tesla is initially expected to sell Completely Built-Up (“CBU”) products imported from its huge factory in China.

The company will likely take up the direct-to-customer retail route and thus bypass the need for showrooms and service centers.

Tesla is expected to launch its Model 3 in India, and apart from this is also expected to open an R&D center that may be set up in Bengaluru.

Tesla is also in talks with the Karnataka government for setting up an assembly plant at Dharwad in north Karnataka. Besides opening its office in Karnataka, Tesla is also stated to be in talks with four other Indian states, namely Tamil Nadu, Andhra Pradesh, Maharashtra, and Gujarat to set up manufacturing and R&D units.

Benefits of the chosen investment route

Netherland’s strong intellectual property (IP) framework is a factor why Tesla chose to set up its subsidiary in the country. Having incorporated as a subsidiary of the Netherlands-based Tesla Motors, Amsterdam – the Indian subsidiary, Tesla India Motors and Energy Pvt. Ltd. will be able to access Tesla’s latest technology.

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Moreover, the tax treaties between India and Netherland allow companies to avail capital gains tax exemption if shares of an Indian firm are sold to a non-Indian entity. Investments from the Netherlands also attract lower dividend taxes as well as withholding taxes.

The route taken by Tesla via the Netherlands confirms the route as an investment gateway into India. As per Reserve Bank of India data, with US$5.3 billion worth of inflows in FY 2020-21, Netherlands stands as the third-largest source of FDI in India after Singapore and Mauritius.

In FY 2015-16, the Indian Government revised its tax treaties with Singapore and Mauritius by altering capital gains tax exemptions, after which the Netherlands rose in prominence as an alternative investment gateway into India. 

Why did Tesla choose Bengaluru?

Overall, Karnataka’s favorable policies target the creation of an electric vehicle (EV) ecosystem. The state capital, Bengaluru, can also be called the EV capital of India, besides housing the biggest clusters of technology and R&D centers for the automobile industry in the country. Bengaluru attracts India’s finest IT and engineering talent pool that Tesla’s R&D unit could easily tap into. Many other international automobile R&D units are set up in the city, including those of leading companies Mercedes-Benz, Great Wall Motors, General Motors, Continental, Mahindra & Mahindra, Bosch, Delphi, and Volvo.

Talking of supportive policies, the Karnataka government approved the New Industrial Policy for 2020-25 in July last year. Overall, the new industrial policy seeks to attract investments worth INR 5 trillion (approx. US$66.89 billion). The sectors encouraged include automobiles and auto components, pharmaceuticals, medical devices, knowledge-based industries, electric vehicles, and logistics, among others. (For more information, see Karnataka’s New Industrial Policy for 2020-25: What Should India-Bound Foreign Investors Expect.)

In other developments, Karnataka amended the Karnataka Industrial (Facilitation) Act in 2020 and launched an affidavit-based approval system (ABAS) on December 21, 2020, which will allow eligible private sector investors to set up a business in Karnataka without requiring multiple clearances for the first three years of establishment.

The state government also amended Section 109 of the Karnataka Land Reforms Act to enable easier acquisition of agricultural land for industrial purposes. (For more information, see, Karnataka’s New Approval System and Ease of Doing Business Reforms.)

Tesla in talks with other states: What do we know

Tesla’s talks are still on with the Karnataka government on future investment details. Meanwhile, other state governments in India have been competing for Tesla’s interest.

Maharashtra

Last October, the Maharashtra government invited Tesla to invest in the state. Maharashtra wants industrial development in the state to align with environment protection.

Thus, in the case with Tesla, the Maharashtra government also wants to push for electric mobility and sustainability besides manufacturing investment. For this reason, several rounds of talks have already taken place between the state government and Tesla, although we do not know to what outcome.

Tamil Nadu

The state of Tamil Nadu too has not lagged behind in their pursuit. Its chief minister visited Tesla’s San Francisco-based plant in September 2019 and the state government has been trying to woo the company to invest in Tamil Nadu since then.

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Tamil Nadu’s EV policy proposes a 100 percent exemption on electricity tax until December 31, 2025 for EV charging infrastructure and EV-related manufacturing industries in the state. EV-related industries will also receive benefits to obtain land by sale or lease with a 100 percent exemption on stamp duty for transactions till December 31, 2022.

The Tamil Nadu EV Policy also proposes a higher capital subsidy of 20 percent on investments of over 20 years for EV battery manufacturing. The new EV policy offers to provide investors a 50 per cent subsidy on the land cost if the investment is made to obtain land from government agencies in southern districts, while in other districts it is just 15 per cent. The special package will be applicable for investments made by December 31, 2025.

Gujarat

Another contender is the state of Gujarat that has emerged as a major hub for automobile companies, especially electric vehicles. Suzuki Motor Corp.’s 2017 announcement in this space was followed by JSW Group, which had signed an agreement with the Gujarat government to promote the production of battery-operated vehicles in the state along with the production of electrical battery, storage solutions, and charging infrastructure.

The state is therefore making a strong pitch for Tesla to set up its factory here. In its discussions with Tesla, Gujarat has assured setup assistance and incentives for operating from its port cities, such as Kandla and Mundra.

Located on the Gulf of Kutch, the Kandla Port, that is being developed over 800 acres of land, would make it easier for Tesla to access Middle Eastern markets. All these factors make the Kandla Port an ideal base for Tesla be it for import of spares, assembly, production, or export of cars.

The Mundra plant in Gujarat is also a likely location. It is the country’s biggest port by volumes and is run by Adani Ports and Special Economic Zone Ltd. (APSEZ). The availability of land and the fact that it is linked to the Dedicated Freight Corridor (DFC) work to its advantage.

Andhra Pradesh

Lastly, we have the state of Andhra Pradesh whose efforts to court Tesla perhaps run much earlier than its competitors. In 2016, the state’s delegations were reported to have visited Tesla Motor’s assembly plant in the US to invite them to set up a manufacturing facility in the state.

After Andhra Pradesh’s chief minister’s request for supporting the next phase of reforms in the energy sector for his state in the year 2017, Elon Musk, CEO of Tesla, promised to extend technological expertise for the establishment of two solar energy storage units of 4 MW capacity each, in the Rayalaseema region of the state. In return, the chief minister is said to have promised to provide business to Tesla and help it in commercializing its innovations. With Tesla, the Government of Andhra Pradesh intended to set up regional smart grids by initially converting all agricultural pump sets into solar energy-powered ones and eventually export any surplus power into the grid.

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