Significant changes are coming to the automotive tax landscape, with potential impacts on the prices of various vehicles. The Goods and Services Tax (GST) Council is set to implement revised tax rates that could make small cars and bikes more affordable, while SUV and luxury car buyers may face higher costs. These changes are expected to take effect in late September.

GST Restructuring: A Two-Slab System

The government is proposing to simplify the current GST structure by reducing the number of tax slabs to two. The focus will be on the 5% and 18% slabs, with plans to eliminate the 12% and 28% slabs. A 40% tax rate may be applied to luxury items, "sin goods," and demerit goods.

Winners: Small Cars and Bikes

Small cars with petrol engines up to 1200cc and diesel engines up to 1500cc are likely to see a GST reduction from 28% to 18%. The 1-3% cess on these vehicles may also be removed, resulting in an effective tax reduction of 11-13 percentage points. This could significantly lower the prices of small hatchbacks and compact sedans, making them more attractive to first-time buyers and middle-class families. Similarly, small motorcycles, particularly those under 350cc, are expected to have an 18% GST, a significant drop from the current 28%. This could make two-wheelers more affordable for the average Indian buyer.

Hybrids to Benefit

Small hybrid cars in the sub-4m segment are also expected to benefit from a 10-point reduction in GST. While small petrol cars of engine size up to 1,200 cc are likely to attract 18% GST from 28% at present, reports claim this benefit will be extended to small hybrid cars as well. Larger hybrids may also see some tax relief.

Losers: SUVs and Luxury Vehicles

SUVs and luxury vehicles are likely to face higher tax rates under the new regime. Vehicles longer than 4m with larger engines could be placed under a 40% GST slab. While the current 15-22% cess may be adjusted to keep the overall tax rate close to the existing 50%, this still means SUV buyers won't see much of a price decrease. Moreover, motorcycles with higher capacity engines (above 350cc) might also face a 40% GST. Luxury electric vehicles (EVs) priced above a certain threshold could see GST rates rise from 5% to as high as 40%.

Impact on the Auto Industry

These tax changes are expected to have a significant impact on the Indian auto industry. Lowering the GST on smaller cars to 18% will decrease their prices by up to 10 percent, improving their affordability. Industry experts believe that a 10% GST cut could result in a 7.5% reduction in on-road prices. However, industry bodies also estimate a substantial annual revenue loss if the GST on small cars shifts to 18%. An increase in GST on premium bikes and luxury vehicles could put additional pressure on these segments. Some argue that increasing taxes on bigger, heavier vehicles is fair because they cause more damage to roads.

Considerations for Electric Vehicles

While mainstream EVs are expected to retain their 5% GST rate, there are calls for further rationalization. Some experts highlight that while EVs enjoy low taxation, standalone batteries, charging infrastructure, and battery-swapping services are still taxed at 18%. Moreover, EVs may no longer be tax exempt and could be subject to "luxury car tax" if they exceed a certain price point.

Other Taxes and Fees

Beyond GST, car owners should also be aware of other taxes and fees, such as road tax (Vehicle Excise Duty or VED), which is also undergoing changes. The benefit-in-kind (BIK) tax for company cars has also increased for all car types. Electric cars are no longer tax exempt, and even older ones have to pay the "luxury car tax," which can add a significant amount to the annual cost of ownership.

Disclaimer: Tax laws are subject to change. Consult with a financial professional for personalized advice.