India, the third-largest passenger vehicle market behind China and the United States, is lowering its punishing 100 percent tariffs on cars made overseas to permit certain imported electric vehicles to be sold in India, the Ministry of Commerce and Industry said.

That means the standard range Tesla Model 3, which starts at $38,990 in the United States would cost over $77,000 in India under regulations in place before March 15.

Under the new policy, the government requires companies that wish to import electric vehicles into India to invest a minimum of Rs 4,150 crore (nearly US$500 million) in the country. These investors will have three years to set up a local manufacturing unit for electric vehicles with at least 25 percent localization.

Under the new policy, companies will be allowed to import 8,000 EVs a year at a lower import duty of 15 percent on cars costing $35,000 and up. Access to this lower duty rate is capped, but it is substantially lower than the 70-100 percent previously levied on imported cars.

The investment commitment made by the importing company will have to be backed by a bank guarantee in lieu of the custom duty forgone. The bank guarantee will be invoked in case of non-achievement of Domestic Value Addition and minimum investment criteria defined under the plan’s guidelines.

Tesla, based in Palo Alto, California, has been trying to enter the Indian EV market since 2021. The American EV maker is taking immediate advantage of India’s new policy, and Tesla’s owner, Elon Musk, is making sure he has vehicles ready and waiting for the Indian market, third largest in the world, after the United States and China.

To that end, Tesla has started producing right-hand drive cars for the Indian market at its factory in Berlin, Germany, reports the Hindustan Times. The company plans to have these cars on Indian roads later this year.

A team of Tesla executives will be travelling to India in the third week of April to scout locations for a proposed US$3 billion electric vehicle factory, the Financial Times reports.

The Tesla group will focus on states with existing automotive hubs, such as Maharashtra, Gujarat and Tamil Nadu which are near ports, enabling the easy export of locally-made EVs.

In August 2023, Tesla India Motors and Energy Private Limited leased office space in the city of Pune in the state of Maharashtra, the state where the Indian automaker Mahindra and Mahindra is already located.

The electric XUV400 is Mahindra’s e-SUV, which the company says combines toughness with the dynamics and eco-friendliness of an electric powertrain.

Tesla plans to build a new small EV, dubbed ‘Model 2’ at its future factory in India. This small Tesla is expected to be priced under US$30,000 and will be exported to markets in Southeast Asia, the Gulf, Africa, and Eastern Europe, the company says.

Tesla’s India unit is expected to have a maximum production capacity of 500,000 units a year. A battery plant could follow at a later stage.

Tesla does have an EV factory in China. The Shanghai Super Factory, known as Giga Shanghai, or Gigafactory 3, in the city of Shanghai. Construction of the plant began in January 2019, initial production started in October, and the first production vehicles rolled out of the factory in December 2019, less than one year after groundbreaking.

The main plant now manufactures the Tesla Model 3 and Model Y. As of July 2023, Tesla says the factory has the capacity to build over 750,000 vehicles a year and serves as the primary production site for Tesla vehicles exported to regions without a Gigafactory, such as India.

Unique among foreign automakers in China, the plant is wholly owned by Tesla and not operated as a joint venture with a Chinese company, the first time the government had allowed such an arrangement.