Diwali gift for auto sector: Govt likely to reduce GST on cars, two-wheelers from 28% to 18%

All cars and two-wheelers are under 28% GST slab at present.

In what could prove to be a magnificent Diwali gift for the automobile sector, the government is reportedly expected to lower the Goods and Services Tax (GST) on passenger vehicles (PVs) and two-wheelers, enhancing their affordability quotient.

At present, all PVs attract a GST of 28%. Additionally, there is a compensation cess ranging from 1% to 22%, depending on engine capacity, length and body type, taking the total tax payable to as high as 50%. However, the electric cars are taxed only at 5% with no compensation cess.

For two-wheelers, while the GST is 28%, the compensation cess is nil for models having an engine capacity of up to 350cc and 3% for those with an engine capacity of more than 350cc.

Later this week, the three Group of Ministers (GoMs), set up by the GST Council, will meet to review the Centre's tax structure rationalisation proposal. Their recommendations will then be placed before the GST Council.

The revised tax structure proposes to retain 5% and 18% slabs and remove 12% and 28% slabs, benefitting mass-market cars and two-wheelers. However, some sin goods, including luxury cars, might be taxed at 40%.

In his address on the occasion of 79th Independence Day, Prime Minister Narendra Modi said: "This Diwali, I am going to make it a double Diwali for you. This Diwali, you, fellow countrymen, are going to get a very big gift. In the last eight years, we have done a big reform of GST, reduced the tax burden across the country, simplified the tax regime, and after eight 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 coming with the next generation of GST reforms, which will be a gift for you this Diwali. Taxes needed by the common man will be reduced substantially, and a lot of facilities will be increased. Our MSMEs, our small entrepreneurs, will get a huge benefit. Everyday items will become very cheap and that will also give a new boost to the economy," he added.

The GST reduction will particularly benefit the entry-level models in PV and two-wheeler segments, which have been facing headwinds due to multiple factors, including higher acquisition costs and rising interest rates. Also, the demand recovery has been impacted due to price-sensitive buyers remaining cautious.

The original equipment manufacturers (OEMs) have also cited increased input costs and regulatory changes, such as mandatory safety features and updated emission standards, as reasons for the upward shift in the price of entry-level models.

In the past, Maruti Suzuki India Chairman R C Bhargava has advocated tax revisions to boost the demand for small cars. Even Hero MotoCorp Executive Chairman Pawan Munjal and Bajaj Auto Managing Director and CEO Rajiv Bajaj have sought a reduction in GST on two-wheelers to 18% from 28% to boost the demand.

According to data from the industry body Society of Indian Automobile Manufacturers (SIAM), the small car sales, excluding utility vehicles (UVs), dropped 11.58% year-on-year at 12,79,467 units in FY25 from 14,47,060 units in FY24.

The entry-level motorcycle segment, having models with an engine capacity of up to 110cc, remained flat in FY25 at 56,57,125 units, as per SIAM data.

For the automobile sector, a reduction to 18% would directly lower ex-showroom prices, especially for entry-level models where demand recovery has been slower. The sector executives, analysts and industry bodies have consistently lobbied for a cut from 28% to 18%, arguing that it would expand affordability, support sales and aid manufacturing growth.