GST cut brings cheer in auto industry, demand expected to pick up

The relatively lower GST rates on vehicles are expected to improve demand in the industry.

Hailing the government's decision to rationalise the Goods and Services Tax (GST) as "landmark", the automobile industry executives said that the move will boost demand across different segments by making vehicles relatively affordable.

Following the GST restructuring, the internal combustion engine (ICE) cars and two-wheelers are now under two slabs, 18% and 40%, while three-wheelers and commercial vehicles (CVs) are in the 18% slab.

Before the rejig, ICE cars attracted 28% GST and compensation cess from 1% to 22%, depending on the length, body style and engine capacity of the vehicle, resulting in the total tax of 29% to 50%. For ICE two-wheelers, while the GST was the same at 28%, the compensation cess was from nil to 3% depending on the engine capacity, with the total tax being 28% to 31%. On ICE three-wheelers and CVs, there was a flat 28% GST with no compensation cess.

There has been no change in GST on electric vehicles (EVs). They were and are still under the 5% slab. However, hydrogen fuel cell vehicles (FCEVs) have been moved to the 5% slab from the 12% slab. There was no compensation cess on these two categories even before restructuring.

The government's GST rationalisation decision will benefit all categories of vehicles in terms of taxation and final retail price, barring one, which is the ICE two-wheelers with an engine capacity of over 350cc. They earlier attracted a total tax of 31% (28% GST + 3% compensation cess), but are now under the 40% slab.

The new GST rates on vehicles will become effective from September 22, the first day of the nine-day Navaratri festival.

The tax restructuring comes at a time when all segments are facing headwinds. In Q1 FY26, the car sales declined 1.4% y-o-y at 10,11,882 units, the two-wheeler sales dropped 6.2% y-o-y at 46,74,562 units, the three-wheeler sales were flat at 1,65,211 units, and CV sales slipped 0.6% y-o-y at 2,23,215 units.

Maruti Suzuki India Chairman R C Bhargava said that the restructuring of the GST system will give a boost to the entire economy and take the country closer to its goal of a Viksit Bharat. "This reform is another step that would empower the people to shape their future themselves. The last budget put a substantial amount of money into their pockets. Borrowing rates have come down due to inflation control and financial prudence. The new GST system will make many items of daily use more affordable. The people will have more purchasing power, and that would stimulate more demand and production. The speed of decision-making and implementation is also admirable," he added.

"The automotive industry would be a direct beneficiary of faster economic development. In particular, Maruti is grateful for small cars being placed in the 18% GST basket. The 10% lower tax will stimulate a flagging market, and many more people will be able to buy safer and more comfortable means of mobility. The growth of the car industry in general will also benefit from the GST system and we expect the industry growth rate to come back to about 7% a year. Manufacturing growth and employment will both benefit," Bhargava observed.

As per industry estimates, a reduction of 10% tax will result in the retail prices of mass market models coming down by 8% to 9%. A sector analyst, who did not wish to be named, said that the Maruti Suzuki Baleno could become cheaper by almost Rs 70,000.

The prices of other top-selling Maruti cars like the WagonR, Swift, Dzire, Fronx, Brezza and Ertiga will also come down.

"We at Hyundai Motor India welcome the landmark GST reforms announced by the government of India. This revolutionary step will provide a strong impetus to the Indian economy, enhance buoyancy and further strengthen consumer confidence. By reducing the tax burden on essential goods, the government has laid the foundation for inclusive growth and a robust, consumption-led economy. The GST overhaul will directly benefit the automotive sector. The announced reforms align seamlessly with the government's commitment to Viksit Bharat and the Make-in-India initiative, encouraging domestic manufacturing and boosting demand across both urban and rural markets," said the company's Managing Director, Unsoo Kim.

Hyundai's 60% ICE portfolio will now fall under the 18% slab, with the remainder at 40%. The company's volume driver, the Creta, which earlier attracted total tax in the range of 45% to 48%, will move to the 40% slab now.

"We applaud the government for this landmark GST rationalisation, which will have a far-reaching positive impact across the automotive and farming sectors. The move makes tractors and farm machinery more affordable for farmers, reduces costs for CVs 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," said Rajesh Jejurikar, ED and CEO, Auto and Farm Sector, Mahindra & Mahindra.

"We also appreciate the continuation of the 5% GST rate on EVs, which is a critical enabler of India's clean mobility vision. This measure will further accelerate the adoption of EVs and reinforce India's leadership in sustainable, green transportation," he added.

Mahindra's volume driver, the Scorpio, is set to come under the 40% tax bracket from the maximum levy of 50% earlier. Even the XUV700 and the Thar Roxx will witness a price drop now.

"These reforms reflect Prime Minister Narendra Modi's vision for next-generation GST that prioritises both ease of living and ease of doing business. The streamlined GST framework goes beyond rate rationalisation with structural reforms enhancing long-term confidence in India's economic environment. The GST Council's decision to retain the 5% GST rate on EVs is a forward-looking move that reinforces India's commitment to sustainable, zero-emission mobility and signals long-term policy stability. The reduction of GST on small cars to 18% further expands access to personal mobility, making it more affordable for a broader section of society," said Shailesh Chandra, Managing Director, Tata Motors Passenger Vehicles and Tata Passenger Electric Mobility.

The luxury cars, which have mostly been in the higher tax brackets of 48% and 50%, will see a significant price cut after moving to the new 40% bracket. For reference, the Mercedes-Benz C-Class could see a price drop of around Rs 3.50 lakh.

"The government listened to the industry's long-standing wish list of rationalising GST rates. This GST revision is a step in the right direction, is progressive and will induce the much-needed impetus by boosting consumption and bringing momentum to the automotive industry, which essentially remains the pulse of the Indian economy. We are thankful to the government for keeping the GST rate for EVs unchanged, ensuring faster transition to a decarbonised future," said Santosh Iyer, Managing Director and CEO, Mercedes-Benz India.

For BMW Group India, which sells both cars (BMW and Mini) and two-wheelers (BMW Motorrad), the GST rationalisation step has brought cheer in the car and sub-350cc two-wheeler spaces. However, it will feel the pinch in the over-350cc two-wheeler arena.

"The GST Council decision on rate rationalisation is a welcome development that will positively influence consumer sentiments and boost consumption. The GST rate reduction across various sectors is in line with the government's vision of Viksit Bharat and economic growth. We congratulate the government and GST Council on implementing bold reforms. The 40% GST on premium cars without any additional cess is good news for the premium car industry and will drive new sales," BMW Group India President and CEO Hardeep Singh Brar said, adding that the retention of 5% GST on all EVs is highly welcome.

"For premium motorcycles below 350cc, the reduction of GST to 18% is set to spur demand. However, the increase in GST to 40% for motorcycles above 350cc will have a negative impact on the mid-segment and high-end segment models, which have been seeing good growth for the past few years," he added.

The GST cut is expected to make the BMW 5 Series sedan cheaper by up to Rs 4 lakh, while the BMW X7 SUV could witness a price drop of a whopping Rs 9 lakh. The sector analysts believe that the luxury cars could become cheaper by 5% to 8% now.

"We applaud the government for taking consistent steps towards boosting growth and enhancing the growing middle class's spending power, all towards realising PM's vision of Viksit Bharat 2047. The GST tax cut is a major move by the government to further turbocharge growth. It will significantly boost consumption across segments of society. For our industry especially, it is a welcome move as it will help two-wheelers become more accessible and also help those looking to upgrade," said Sudarshan Venu, Chairman, TVS Motor Company.

Welcoming the GST reduction on three-wheelers from 28% to 18%, Piaggio Vehicles Chairman and Managing Director Diego Graffi said that it is a landmark decision for a segment that contributes 5% to 7% to India's automotive market and continues to serve as the backbone of last-mile transportation. "The lower tax rate will make vehicles more affordable and ownership more accessible for drivers and small businesses, thereby enhancing connectivity across both urban and rural markets," he added.

A similar drop in GST on CVs from 28% to 18% is expected to provide a major stimulus to the segment and enhance volumes.

VE Commercial Vehicles Managing Director and CEO Vinod Aggarwal said that the GST reform is a positive and pro-growth move that will immediately lift consumer sentiment and boost demand across a broad range of sectors. "It is truly a festive gift from the government to the nation and the automotive industry. We wholeheartedly applaud the Finance Minister and the GST Council for reducing GST on CVs, buses and trucks, from 28% to 18%. This will not only reduce logistics costs for the economy, but also encourage customers to upgrade their fleets with modern, fuel-efficient and safer trucks and buses," he added.