Prime Minister Narendra Modi’s Independence Day speech has offered a glimmer of hope for the Indian consumers and industry amid potential tariff headwinds from the US.
The government is reviewing the Goods and Services Tax (GST) structure, and relief can be expected by Diwali this year. Though Modi did not mention any sector, it is widely believed that there could be efforts to reduce the overall tax burden on consumers buying vehicles, especially entry-level cars and two-wheelers, while an overhaul of the existing structure could also resolve classification disputes related to engine capacity and vehicle size.
“In the last 8 years, we have done a big reform of GST, reduced the tax burden across the country, simplified the tax regime and after 8 years, the need of the hour is that we should review it once. We started the review by setting up a high-power committee and also held discussions with the states…We are bringing the next generation of GST reforms.. This will be a gift for you this Diwali, taxes needed by the common man will be reduced substantially, a lot of facilities will be increased,” Modi said.
The current GST rates fall in four primary slabs – 5%, 12%, 18%, and 28%, while some essential items such as fresh vegetables and milk have zero GST. Most vehicles have a GST rate of 28% with an additional compensation cess, ranging from 1% to 22% depending on the type of vehicle. The tax on small petrol cars is around 29%, while it soars to 50% for large SUVs. This complex and varied system has resulted in disputes over vehicle classification.
According to a report from the Press Trust of India, the GST on automobiles will be restructured to resolve classification disputes related to engine capacity and vehicle size, ultimately benefiting the buyers.
The government has reportedly proposed moving the GST system to a two-tier rate structure of 5-18% and a 40% slab for a few items, and automobiles will also be placed in a slab to eliminate disputes arising from the classification.
A report from NDTV said the government is proposing to overhaul the vehicle tax structure by shifting to a new categorization based on engine capacity instead of vehicle type. Under this framework, a single category would be reportedly created for small cars with engines below 1200cc.
A separate, higher-tax bracket would be applied to bigger cars with engines above 1200cc. If implemented, small cars could reportedly see their GST rate reduced to 18%, a significant drop from the current 28% plus cess.
These changes could potentially boost demand in the entry-level segment at a time when the passenger vehicle is struggling for growth. Mass market passenger vehicle makers, including Maruti Suzuki, Hyundai India and Tata Motors, will benefit if the proposed new GST structure is implemented. More than 60% of the sales of these three automakers come from vehicles less than 1,200cc.
Recently, RC Bhargava, the chairman of India’s largest passenger vehicle manufacturer Maruti Suzuki, has raised a red flag on the long-term health of the country’s passenger vehicle industry amid sluggish sales growth and called for government policies that can facilitate the growth of the car industry.
Bhargava highlighted a concerning trend – the industry’s average annual growth rate has stagnated at just 4.4% over the last six years. The situation worsened recently, with retail sales growth at a mere 3% in fiscal year 2025, and a subsequent decline of 1.3% in the first quarter of the current fiscal year.
The slowdown in the growth rate reflects de-growth in the entry-level, or small hatchbacks, which has been the segment that brings a lot of first-time buyers to the passenger vehicle market from the two-wheeler market.
Substantial increases in the cost of these cars, disproportionate to the increase in income levels, punched a hole in this segment over the years. Factors such as overall inflation and challenges in the IT industry further weakened the sentiments. The share of first-time buyers is estimated to have gone down over the year to around 40%, while the car penetration level in India is around 34 per 1,000 people.
Under the current tax structure, two-wheelers up to 350cc are taxed at 28% GST, while those above 350 cc engines attract an additional 3% cess. Both retailers and manufacturers (OEMs) have been advocating for lower taxes, arguing that these vehicles are a necessity rather than a luxury for many Indian consumers. The industry’s push for tax rationalization stems from concerns over weak growth and declining sales, which they attribute to affordability issues.
The Federation of Automobile Dealers Association has recently urged the GST Council to consider reducing GST on two-wheelers from 28% to 18% to help revive growth in this vital segment, which represents 75% of total auto sales volumes in India. The two-wheeler sales are yet to hit the pre-COVID high set in 2018-19.
The central government’s proposal to simplify the GST structure, which includes eliminating the 12% and 28% tax slabs, will reportedly be presented to the Group of Ministers on GST rate rationalization for discussion on August 21.
Following this deliberation, the GST Council – a body consisting of finance ministers from both the central and state governments – is expected to convene in September to review and potentially approve the final GST rate structure, aiming for implementation before Diwali.