The Finance Ministry has earmarked Rs 2,000 crore as special assistance for states, in a move to persuade state governments to scrap vehicles that are older than 15 years and offer road tax concessions to private persons when they buy a new vehicle after retiring their old automobile.

The assistance or incentive will be available on a "first come, first served" basis, and states will have to achieve certain milestones.

In a letter addressed to all chief secretaries last week, the Department of Expenditure told states that the “Incentives for Scrapping of Old Vehicles” has been included in the special assistance to states for capital investment for the year 2022-23.

It said this move aims to provide incentives to states for "scrapping of state governments’ vehicles which are old vehicles and providing tax concessions to individuals for scrapping old vehicles."

States will also have to grant a one-time waiver of pending liability on old vehicles that are scrapped at registered vehicle scrapping facilities for at least one year.

Recently, the Finance Ministry issued a circular asking all central government departments and PSUs (public sector undertakings) to mandatorily scrap their 15-year-plus vehicles.

The direction came only days after the Road Transport Ministry made scrapping of such government vehicles mandatory, both for the centre and states, including buses run by transport corporations and vehicles owned by local bodies and panchayats, from April 2023.

Sources said there were doubts about whether states would go this route considering the financial implications. They added that the Finance Ministry’s new incentive scheme will now convince more states to opt in. The incentive will be applicable until March 2023.

As per the Department of Expenditure circular, the grant will be provided in two tranches — first half after the states meet conditions and become eligible to avail the incentive and the remaining half after the road transport authority certifies that the states have completed the requirement within the prescribed timeline.

States will also be free to propose any capital investment project from the incentive amount.