Auto industry welcomes GST rationalisation proposal, expects demand revival

Vehicles are currently taxed differently depending on type.

The automotive sector has reacted positively to the Union government's proposal to rationalise Goods and Services Tax (GST) rates, calling it a reform that could revive demand. Industry leaders, however, said more clarity from the GST Council will be required before the impact can be assessed.

GST, which replaced multiple indirect taxes in July 2017, currently operates in four slabs -- 5%, 12%, 18% and 28%. Vehicles are taxed differently depending on type.

At present, electric vehicles (EVs) attract a 5% GST, hydrogen fuel cell vehicles (FCEVs) are in the 12% bracket, and all internal combustion engine (ICE) vehicles -- cars, two-wheelers, three-wheelers and commercial vehicles -- fall in the 28% category. On top of this, a compensation cess from nil to 22% is levied depending on the engine size, body type and length.

The government has proposed to remove the 12% and 28% slabs, retaining only the 5% and 18% categories. If approved, the move is expected to reduce the tax burden on several vehicle classes.

Maruti Suzuki India Chairman R C Bhargava described the announcement as significant but said the specifics are still awaited.

"The announcement by the Prime Minister that the entire GST structure is being revamped is very welcome. It is a much-needed reform. The government needs to be congratulated for what they are doing. We have to wait till the GST Council decides on the details of how this restructuring will be implemented, including what cars and other vehicles will carry as GST. Only then will we be able to share further details," Bhargava told Moneycontrol.

Bajaj Auto Executive Director Rakesh Sharma pointed to the potential impact on demand, especially for smaller vehicles.

"While the specifics are not confirmed as yet, but indeed if two-wheelers and three-wheelers are moved to the 18% slab from the current 28% slab, demand will get stimulated and the industry should see some robust growth. The two-wheeler industry in particular had peaked in FY19 and by FY25 it had recovered to only about 90-92% of that level. Hence, there is potential consumption to be unlocked. Both two-wheelers and three-wheelers are used by common people and deliver an essential service today as mobility needs are rising exponentially," Sharma said.

The entry-level car and two-wheeler segments have struggled with affordability over the last few years. Higher ownership costs and muted demand have slowed recovery, even as SUVs gained share. A reduction in GST could make commuter-focussed models more affordable and restore momentum in both urban and rural markets.

While the GST Council will decide the final categorisation and cess structure, expectations are that the new tax structure will be implemented before Diwali.