According to an industry group, biofuels, flex-fuel cars, and hybrids can improve air quality quickly, reduce the need for oil imports, and increase farmer incomes.
The Indian Sugar and Bio-energy Manufacturers Association (ISMA) has asked for extensive fiscal and policy changes to accelerate biofuels and sustainable transportation solutions as India struggles with growing urban air pollution, rising crude oil imports, and growing climate responsibilities.
Ahead of the Union Budget 2026–27, ISMA has urged the Government of India to undertake comprehensive GST rationalisation and targeted incentives across the biofuel and clean mobility ecosystem, arguing that the sector offers immediate, scalable benefits for emissions reduction, rural livelihoods and energy security.
“The Union Budget 2026–27 presents a defining opportunity to align India’s fiscal policy with its clean energy ambitions,” said Deepak Ballani, Director General, ISMA. “Our 10-point submission is a blueprint to transform the Indian sugar sector into a multi-vertical BioEnergy Hub for the world. By rationalising GST on flex-fuel vehicles and hybrids, and incentivising advanced biofuels such as SAF, green hydrogen and isobutanol, India can achieve rapid carbon reduction without waiting for new infrastructure.”
Push for GST parity on flex-fuel vehicles and hybrids
The harmonisation of GST rates on Strong Hybrid Electric Vehicles (SHEVs) and Flex-Fuel Vehicles (FFVs) with electric vehicles is the fundamental component of ISMA’s suggestions. In order to attain equivalence with vehicles powered by gasoline, the organisation has suggested rationalising the steep 40% GST on large FFVs and lowering the GST on FFV two-wheelers and small cars from 18% to 5%. According to ISMA, electrified FFVs and hybrid components ought to be subject to a 5% GST.
To accelerate adoption, the industry body has proposed government procurement mandates and fleet-level adoption of FFVs, along with demand-side incentives similar to the FAME II scheme.
Lower taxes on ethanol fuels and equipment
ISMA has also sought a reduction in GST on hydrous ethanol and higher blends such as E85 and E100 from 18% to 5%, citing ethanol’s carbon-neutral profile. Lower taxes would help keep pump prices competitive with petrol while addressing mileage differences. The association has further recommended notifying distilleries as dispensing entities to improve last-mile availability.
In addition, ISMA has proposed slashing GST on ethanol production machinery from the current 18–28% to 5%, drawing parallels with tax incentives that helped scale up India’s solar manufacturing ecosystem.
Expanding beyond E20: Isobutanol and advanced fuels
With ethanol production capacity now exceeding demand under the E20 blending programme, ISMA has flagged the urgent need to diversify ethanol offtake. It has sought a ₹200 crore support fund to validate and commercialise isobutanol blending with diesel, a move seen as critical for decarbonising freight, railways and other diesel-intensive sectors.
To strengthen institutional capacity, the association has proposed launching a Bharat Biofuels Alliance (BBA), aligned with the Global Biofuels Alliance, to drive research, innovation and policy coordination. ISMA has offered to host the alliance’s secretariat.
Bio-energy hubs in sugar refineries
A major structural reform proposed by ISMA is the creation of integrated bio-energy hubs within sugar refineries. The association has recommended a ₹2,000 crore support fund to convert mills into multi-product bio-refineries producing 1G and 2G ethanol, compressed biogas (CBG), sustainable aviation fuel (SAF), bio-hydrogen, green electricity and bio-based chemicals.
According to ISMA, such hubs could reposition rural India as a clean energy powerhouse while providing stable income streams for farmers.
National SAF policy and green hydrogen support
To meet India’s aviation decarbonisation goals, ISMA has called for a dedicated National Sustainable Aviation Fuel (SAF) Policy, backed by a ₹10,000 crore fund. Key recommendations include nil GST on SAF, lower import duties on critical inputs such as enzymes, and a long-term pricing formula for 2G ethanol to ensure investment viability.
On green hydrogen, the association has proposed a ₹1,500 crore viability gap fund to set up 10 green bio-hydrogen production centres as bolt-on facilities in sugar refineries, along with forward pricing mechanisms to ensure assured offtake.
Boost for CBG and clean cooking
ISMA has also sought targeted capital support and simplified environmental clearances for compressed biogas projects within sugar refineries. It has recommended delinking CBG pricing from conventional CNG and introducing a premium to reflect its environmental benefits, noting India’s estimated CBG potential of 62 million tonnes annually.
For household energy, the association has urged reducing GST on ethanol cookstoves and cooking fuel to 5%, along with subsidies for below-poverty-line families. ISMA said ethanol-based cooking solutions can significantly cut indoor air pollution, reduce LPG imports and offer an affordable clean fuel alternative.
A ready-to-scale solution
ISMA underlined that India already has a mature production capacity, an abundance of ethanol, and vehicle technology that have been tested on local roads. The nation may accomplish significant reductions in emissions and improvements in energy security with short gestation periods if it receives the proper budgetary and regulatory backing.
“In India’s clean mobility and clean energy transition, ethanol and its derivatives offer a rare convergence of environmental sustainability, rural prosperity and strategic energy security,” ISMA said. “It is a solution ready to scale—if policy enables it.”