Sweeping GST cuts in auto sector to rev up sales, will earnings bump up too?

04 September, 2025 | 16:12 IST

Highlights

The automotive sector has been in the spotlight with respect to the Next-Gen goods and services tax (GST) cuts announced by the government. Better still, it is timely in that it comes into force on September 22, on the first day of the festive season (Dussehra). In the Indian context, this is typically a consumer-oriented period where households purchase discretionary items, including vehicles.

The GST reduction is broadly in line with expectations on the Street that had also led to a rally in auto stocks in spite of weakening sales seen in the last three to four quarters. In fact, beginning FY2025, passenger vehicle sales had petered down to small single-digit growth and two-wheelers too were displaying sluggishness in domestic markets.

Well-rounded consumer bonanza

Evidently, the big push is in small cars and mid-segment sedans and hatchbacks that are below 1200 cc engine capacity. GST is down to 18 per cent from the earlier 28 (effective 29 per cent). Small cars particularly have been price-sensitive and inflationary conditions since COVID-19 had marginalised sales in this segment. Car companies such as Maruti Suzuki, Hyundai, Tata Motors and Mahindra have a strong presence in this segment and would benefit.

Likewise, a GST rate of 18 per cent for two-wheelers below 350 cc addresses the mass commuter segment (scooters) and also motorcycles, which are dependent on rural and semi-urban markets for their sales. The cut in GST comes at a time when the monsoon has been favourable and rural demand is in an expansionary mode. It delivers a shot in the arm for Hero Motocorp, TVS Motor and Bajaj Auto. However, gains may be limited or even be hit adversely for Royal Enfield motorcycles from the Eicher Motors stable (31 percent effective GST now moves higher to 40 per cent).

EVs over hybrids

The GST rates on electric vehicles (EVs) remaining at 5 per cent, while the tax rates on hybrid PVs being in line with the internal combustion engine counterparts, shows that the government is signalling a preferred shift to EVs compared to hybrids.

Interestingly, GST rates have been cut on diesel vehicles too based on the engine capacity and the length, as is the case in the petrol counterparts.

Volume driven earnings growth

The key point to note is the rationalisation of both the inverted duty structure and the alignment of GST on auto parts and, support to higher-end luxury cars above 1500 cc or above 4000 mm in length is a welcome step. Industry analysts estimate that at least 40 per cent of the utility vehicles portfolio will move into the 18 per cent slab from the earlier 28-31 per cent (including the cess)- a big plus for PV companies.

One can expect a savings of 7-10 per cent in final price of vehicles assuming that all the gains from GST reduction is passed on to the end-user.

Auto sector analysts are optimistic on the outlook now. GST rate cuts and festive demand could also be fuelled further by interest rate cuts, all of which put together should lower the cost of ownership over the remaining quarters of FY2026. How much sales grows and whether the customer bites the bait depends on how much of the cost reduction is passed on to the customer.

Elara Capital’s report states that historical excise duty cut indicates there was positive demand momentum in the following two years (but there were also factors of low base especially post the global financial crisis in FY08). Incidentally, some large brokerages had raised the FY2026-2028 earnings forecasts for two-wheelers and passenger vehicle companies with estimates of 3-8 per cent volume growth. For now, investors have given a thumbs up to auto stocks that opened in the green.

Write in to Vatsala.Kamat@nw18.com with your views on how much the auto sector coudl gain from GST cuts

About the Author

Vatsala Kamat

is Senior Associate Editor at Moneycontrol.