Small cars get relief after GST council decision

GST rates on common-use items ranging from hair oil to corn flakes and TVs were slashed after the all-powerful GST Council on Wednesday approved a complete overhaul of the tax regime

The Goods and Services Tax (GST) Council has redrawn the automobile tax regime, delivering relief to small car buyers while tightening levies on hybrids and premium models. At its 56th meeting on September 3, the Council cut GST on mass-market hatchbacks and compact SUVs but raised rates for larger hybrids and luxury vehicles. The changes take effect on September 22, 2025.

Big boost for small cars

The sharpest reduction is for small cars, still the backbone of India’s passenger vehicle market. Petrol, CNG and LPG cars with engines up to 1200cc and length not exceeding four metres will now attract 18 percent GST, down from 28 percent.

Diesel cars with engines up to 1500cc and within the same length limit will also move to the 18 percent slab. The 10-point cut is expected to shave 5-7 percent off ex-showroom prices of popular models such as Maruti Swift, Hyundai i10, Tata Punch and compact SUVs like the Brezza and Venue. Automakers have long pressed for such relief, arguing that affordability at the entry level is critical for sustaining demand in a price-sensitive market.

Hybrids and bigger cars, SUVs to be taxed at 40%

While small hybrids that qualify as small cars will also benefit from the 18 percent slab, larger petrol-electric and diesel-electric hybrids have been pushed into the top tax bracket.

Vehicles with engines above 1200cc (for petrol) or 1500cc (for diesel), or length exceeding four metres, will now attract 40 percent GST, up from 28 percent. The decision runs counter to industry expectations that hybrids would receive tax incentives as a bridge to electrification. Pure electric vehicles remain taxed at just 5 percent, signalling the government’s preference for direct EV adoption.

However, removal of cess that was previously applicable over and above the GST, is likely to result in marginal relief for premium and luxury vehicles as well as for hybrids. Cess, in the range of 1 percent to 22 percent was charged above the 28 percent GST rate for different class of vehicles. This cess will now no longer be applicable, thus some categories of large vehilces will stand to benfit from this move, despite GST rate moving up to 40 percent.

Luxury vehicles and high-end two-wheelers 

Premium and luxury vehicles remain heavily taxed, with cars and SUVs that fall outside the small car definition continuing in the 40 percent bracket.

Motorcycles above 350cc will also face 40 percent GST, up from 28 percent, while two-wheelers up to 350cc, three-wheelers and ambulances will shift to the lower 18 percent rate.

The GST Council’s changes reflect a balancing act. Relief at the lower end of the market is aimed at supporting affordability for middle-class households and spurring demand ahead of the festive season. At the same time, higher rates on hybrids and premium models protect tax revenues and underscore the policy tilt towards pure electric vehicles.

For automakers, the new structure creates sharper divides: manufacturers with strong small-car portfolios may see volumes rise, while those betting on hybrids and premium models will need to recalibrate pricing and product strategies.

Small cars, defined as models with engines under 1200 cc (petrol) or 1500 cc (diesel) and length within four metres, accounted for only about one-third of total passenger vehicle sales in FY 2024-25, down from nearly half before the pandemic. This means nearly two-thirds of buyers are now opting for larger cars that fall in the higher-taxed “premium” bracket.

In two-wheelers, premiumisation is more modest: motorcycles above 350 cc, led by Royal Enfield, made up just under 14 percent of total sales, with the bulk of demand still concentrated in commuter and mid-segment bikes.

Cess, which has long inflated the effective tax burden on automobiles, has now been removed for small cars. These vehicles will pay a flat 18 percent GST.

But premium cars, SUVs and larger hybrids remain subject to cess in addition to the base GST, keeping their overall tax incidence at 40 percent. In effect, the Council has extended the cess regime to cover bigger hybrids, aligning them with luxury vehicles, while giving full relief to the mass-market small car segment.