Diwali bonanza for automotive industry with GST cuts on cars, bikes, tyres
Diwali bonanza for automotive industry with GST cuts on cars, bikes, tyres
Experts term it ‘transformative’ and ‘defining’
In a welcoming move for the auto industry, the Goods and Services Tax (GST) Council has cut rates on small cars, bikes, SUVs and tyres, by slashing levies to 18 percent, whereas larger ones will be taxed at 40 percent.
Hailed as ‘transformative’ for the auto industry, the rationalisation will boost demand in the auto sector. Until now, entry-level buyers have stayed away since the Covid-19 pandemic due to steep rises in automobile prices and subdued income growth.
The levy on small cars (less than four metres in length and engine capacity under 1200 cc for petrol and 1500 cc for diesel), will now attract 18 percent GST effective from 22 September, compared with 29–31 percent under the current regime. Prices of small cars may decline by 12–13 percent ex-showroom if there’s a 10–11 percent duty cut.
Meanwhile, motorcycles with engine capacity below 350 cc will also be taxed at 18 percent, as against 28 percent earlier. While the 12 percent and 28 percent slabs have been scrapped, the 5 percent and 18 percent slabs remain. The government has also withdrawn the compensation cess. However, a new 40 percent slab for sin and luxury goods has been introduced.
Across the automotive ecosystem, industry experts appreciated the move while seeking clarity on the utilisation of compensation cess on unsold vehicles to ensure a smooth transition.
Shailesh Chandra, President, SIAM, remarked, “The automobile industry welcomes the government’s decision to reduce the GST on vehicles to 18 percent and 40 percent, from earlier rates of 28 percent to 31 percent and 43 percent to 50 percent, respectively, especially in this festive season. It will bring renewed cheer to consumers and inject fresh momentum into the sector. Making vehicles more affordable, particularly in the entry-level segment, the announcements will benefit first-time buyers and middle-income families, enabling broader access to personal mobility.”
He added, “We also thank the government for continuing with the GST rate of 5 percent on electric vehicles, which will help sustain the ongoing momentum towards sustainable mobility. Furthermore, the resolution of classification interpretations and the correction of the inverted duty structure will greatly streamline business processes across the automotive industry, supporting ease of doing business. We are confident that the government will also soon notify suitable mechanisms for the utilisation of compensation cess on unsold vehicles, ensuring a smooth and effective transition.”
Saurabh Agarwal, Partner and Automotive Tax Leader, EY India, stated, “By making vehicles more affordable across all segments, this move will not only boost consumer spending but also simplify complex classification disputes that have long burdened the industry. The discontinuance of the cess is a particularly pragmatic step, which will provide much-needed support to a sector that is a vital contributor to our nation’s GDP.”
However, he cautioned that companies would need to reassess the financial impact of state incentives and subsidies, which are often linked to GST rates. “This may necessitate a renegotiation with state governments to address potential changes in costs and claw back periods,” Agarwal added.
Rajesh Jejurikar, Executive Director and CEO, Auto and Farm Sector, Mahindra & Mahindra, described the reform as a ‘landmark’ move. He furthered, “The rationalisation makes tractors and farm machinery more affordable for farmers, reduces costs for commercial vehicles, and improves accessibility for personal mobility rates across all SUVs. These measures will stimulate demand and drive inclusive growth across the entire ecosystem.”
Jejurikar also welcomed the continuation of the 5 percent GST rate on EVs, calling it a ‘critical enabler’ for India’s clean mobility transition.
Arnab Banerjee, MD and CEO of CEAT, highlighted the direct benefit to the tyre industry. He pointed out, “The reduction of GST on new pneumatic tyres from 28 percent to 18 percent, and the further relief for tractor tyres and tubes to 5 percent, is a progressive step that will significantly benefit the industry. By addressing a long-standing demand, the Council has created room for greater formalisation, compliance, and sustainable growth in the sector.”
Similarly, Anish Shah, Group CEO and MD, Mahindra Group, described the reform as ‘defining.’ He added, “By moving to a streamlined two-rate structure and focusing on essentials that touch the lives of every citizen - from food, health, and insurance to agriculture and small businesses, the government has reaffirmed its commitment to ease of living and ease of doing business. The measures simplify compliance, expand affordability, and energise consumption, while enabling industry to invest with greater confidence.”
Industry analysts believed the overhaul would stimulate demand in the automotive and allied sectors and eliminate the long-standing distortions in the tax framework. In the coming quarters, they hoped for stronger sales.
