After SUV surge, will GST cuts drive a hatchback comeback?

Maruti Suzuki Alto

India’s passenger vehicle market has seen a dramatic shift over the past decade — from being dominated by small cars to SUVs holding more than half of all sales. But with recent GST rate rationalisation and affordability measures, will the hatchbacks see a renewed demand.

Small cars once ruled the Indian roads. The share of small cars in the overall PV market in India was 47.4 % in FY18, and 46 % in FY19. In FY20, it improved marginally to 46.5 % and has been on a decline since. In FY21, it was 45.6 %, 37.5 % in FY22, 34.4 % in FY23 and 27.7 % in FY24. In FY2025, the share of hatchbacks slipped further to just around 23%, while SUVs grew to more than half the passenger vehicle pie.

Smaller sub-4 metre cars now fall under the 18% GST slab, compared to the earlier 29–31% incidence, while the compensation cess on vehicles has been removed. Larger and premium models have also seen a revision, attracting a 40% slab instead of the earlier 43–50%.

Leading automakers have quickly passed on the benefits. Maruti Suzuki has reduced small car prices between Rs 46,400 and Rs 1.3 lakh, while its SUVs and sedans are cheaper by up to Rs 1.13 lakh. Hyundai has slashed prices across hatchbacks, sedans, and SUVs by Rs 60,640 to Rs 2.4 lakh. Tata Motors, meanwhile, is offering reductions of up to Rs 2 lakh on models including the Nexon, Safari, Harrier, and Altroz.

Industry analysts predict that the tax relief will help revive demand in the budget and entry-level car segment.

Srikumar Krishnamurthy, Senior Vice President & Co-Group Head, Corporate Ratings, ICRA Limited said,"The GST rate cut has brought down the effective tax burden on entry cars, making it accessible to a wider consumer base, not restricted to first time buyers." "Lower upfront costs also bring down the related costs like insurance, registration, road tax etc. as they are calculated based on ex-showroom price." "Apart from this, factors like additional festive-linked discounts, favourable financing terms and better rural output support the demand for passenger vehicles in this festive season."

Ravi G Bhatia President and Director of JATO Dynamics India said," The recent GST rate rationalisation, effective September 22, 2025, reduced the tax on small cars (typically under 4 meters with petrol engines below 1,200cc or diesel below 1,500cc) from 28% to 18%, lowering prices by around 8-10% and making entry-level models more accessible . The Government policies are supporting growth of small cars to make mobility more accessible."

Also, Maruti Suzuki has reported a sharp rise in daily bookings, with demand for small cars showing significant momentum, according to Partho Banerjee, Senior Executive Officer, Marketing & Sales.

Even as small cars look to regain ground, Maruti acknowledged that the definition of an entry-level car has changed. "For different customers, the entry-level car can be different. We see today that for a bigger car, there are first-time buyers. Some people are directly upgrading to an SUV, even a mid-SUV," Banerjee said. He pointed out that car penetration in India remains very low at 34 vehicles per 1,000 people, suggesting a large base of two-wheeler owners looking to upgrade, Banerjee told Moneycontrol.

Highlighting the strong revival in the segment, he added, "We are witnessing 100 per cent sales growth in small cars. In metropolitan cities we are witnessing growth of around 35-40 per cent."

Multiple factors powered the SUV surge: greater road presence, higher ground clearance, and improved perceptions of safety and utility. Regulatory changes, including stricter safety and emission norms, also raised production costs of small cars, squeezing margins and making SUVs relatively more profitable for manufacturers.

For now, SUVs continue to dominate showrooms. But with affordability and accessibility regaining centre stage, the humble hatchback may yet script a comeback in India’s evolving mobility story.