GST cut makes cars, bikes, tyres cheaper, Diwali comes for Auto Inc

GST rationalisation is likely to boost demand in the auto sector where entry-level buyers have stayed away since the pandemic due to steep rises in automobile prices and subdued income growth.

While small cars are the biggest beneficiaries, larger SUVs are also set to gain as vehicles under four metres will see tax rates slashed from 28 per cent to 18 per cent, and bigger ones will be taxed at 40 per cent. The Goods and Services Tax (GST) Council on Wednesday reduced the levy on small cars (less than four metres in length and engine capacity under 1200 cc for petrol and 1500 cc for diesel), which will now attract 18 per cent GST with effect from 22 September, compared with total levies of 29–31 per cent under the current regime. Prices of small cars may decline by 12–13 per cent ex-showroom if there is a 10–11 per cent duty cut.

Motorcycles with engine capacity below 350 cc will also be taxed at 18 per cent as against 28 per cent earlier. The 12 per cent and 28 per cent slabs have been scrapped, while the 5 per cent and 18 per cent slabs remain, alongside a new 40 per cent slab for sin and luxury goods. The government has also withdrawn the compensation cess.

Nifty Auto rose 3.59 per cent in early morning trade.

Industry leaders across the automotive ecosystem welcomed the move as transformative, though they sought clarity on the utilisation of compensation cess on unsold vehicles to ensure a smooth transition.

Shailesh Chandra, President, SIAM, said, “The automobile industry welcomes the government’s decision to reduce the GST on vehicles to 18 per cent and 40 per cent, from earlier rates of 28 per cent to 31 per cent and 43 per cent to 50 per cent, respectively, especially in this festive season. This timely move is set to bring renewed cheer to consumers and inject fresh momentum into the Indian automotive sector. Making vehicles more affordable, particularly in the entry-level segment, these announcements will significantly benefit first-time buyers and middle-income families, enabling broader access to personal mobility.”

“We also thank the government for continuing with the GST rate of 5 per cent on electric vehicles, which will help sustain the ongoing momentum towards sustainable mobility. Furthermore, the resolution of classification interpretations and the correction of the inverted duty structure will greatly streamline business processes across the automotive industry, supporting ease of doing business. We are confident that the government will also soon notify suitable mechanisms for the utilisation of compensation cess on unsold vehicles, ensuring a smooth and effective transition.”

Saurabh Agarwal, Partner and Automotive Tax Leader, EY India, called the rationalisation a “truly welcome and significant development.” He said, “By making vehicles more affordable across all segments, this move will not only boost consumer spending but also simplify complex classification disputes that have long burdened the industry. The discontinuance of the cess is a particularly pragmatic step, which will provide much-needed support to a sector that is a vital contributor to our nation’s GDP.”

He cautioned, however, that companies will need to reassess the financial impact of state incentives and subsidies, which are often linked to GST rates. “This may necessitate a renegotiation with state governments to address potential changes in costs and clawback periods,” he added.

Rajesh Jejurikar, Executive Director and CEO – Auto and Farm Sector, Mahindra & Mahindra, described the reform as a “landmark” move. “The rationalisation makes tractors and farm machinery more affordable for farmers, reduces costs for commercial vehicles, and improves accessibility for personal mobility through rationalisation of rates across all SUVs. Together, these measures are expected to stimulate demand and drive inclusive growth across the entire ecosystem,” he said. Jejurikar also welcomed the continuation of the 5 per cent GST rate on electric vehicles, calling it a “critical enabler” for India’s clean mobility transition.

Arnab Banerjee, MD and CEO of CEAT, highlighted the direct benefit to the tyre industry. “The reduction of GST on new pneumatic tyres from 28 per cent to 18 per cent, and the further relief for tractor tyres and tubes to 5 per cent, is a progressive step that will significantly benefit the industry. By addressing a long-standing demand, the Council has created room for greater formalisation, compliance, and sustainable growth in the sector,” he said.

Anish Shah, Group CEO and MD, Mahindra Group, described the reform as “defining.” “By moving to a streamlined two-rate structure and focusing on essentials that touch the lives of every citizen—from food, health, and insurance to agriculture and small businesses—the government has reaffirmed its commitment to ease of living and ease of doing business. The measures simplify compliance, expand affordability, and energise consumption, while enabling industry to invest with greater confidence,” he said.

Industry experts believe the overhaul will stimulate demand in the automotive and allied sectors, while also removing long-standing distortions in the tax framework. With the cess gone and rates rationalised, automakers are optimistic about stronger sales in the coming quarters.