The Goods and Services Tax (GST) Council has recently approved a significant restructuring of tax rates within the automobile sector, a move set to make smaller cars and motorcycles with engine capacities up to 350cc more affordable. Effective September 22, 2025, the GST on these vehicles will be reduced from 28% to 18%. This decision, made during the 56th GST Council meeting, aims to provide relief to the common person and boost the automobile sector's growth.

Revised GST Rates and Their Impact

Under the new tax regime, the following changes will take effect:

• Small Cars: Petrol, LPG, or CNG-driven cars with engine capacity up to 1200cc and length not exceeding 4000 mm, as well as diesel cars with engine capacity up to 1500cc and length not exceeding 4000 mm, will now be taxed at 18% GST, a significant drop from the previous 28%. Examples of cars that fall into this category include Maruti Suzuki Alto and Hyundai i10.
• Motorcycles: Motorcycles with engine capacity up to 350cc will also benefit from a reduced GST rate of 18%, down from 28%.
• Larger Vehicles: Conversely, larger passenger cars, SUVs, and high-end cars will face a higher tax rate of 40%. This includes petrol or hybrid vehicles with engine capacity above 1200cc or length exceeding 4000 mm, and diesel or hybrid vehicles with engine capacity above 1500cc or length exceeding 4000 mm. Motorcycles above 350cc will also be taxed at this higher rate.
• Electric Vehicles (EVs): The GST rate for electric vehicles remains unchanged at 5%, in line with the government's objective to promote electric mobility.
• Other Vehicles: Ambulances and three-wheeled vehicles will also be taxed at the reduced rate of 18%. Furthermore, buses, trucks, and auto parts will now have a uniform GST rate of 18%.

Winners and Losers

The GST rate revisions are expected to have a varied impact on different segments of the automobile industry.

• Beneficiaries: Automakers such as Maruti Suzuki, Hyundai, Tata Motors, and Renault are expected to benefit from the reduced GST on small cars. Two-wheeler manufacturers like TVS and Honda Motorcycle and Scooter India will also likely see gains. The reduction in levies on small cars and motorcycles is expected to make these vehicles more affordable, potentially leading to increased sales.
• Potential Setbacks: Royal Enfield and other premium bike makers may face challenges due to the increased GST rate on motorcycles with engine capacity exceeding 350cc. However, luxury car makers like Mercedes and BMW will also benefit with the GST coming down to the new slab of 40%.

Expert Opinions

Industry experts anticipate that the GST cut could lead to a considerable reduction in the prices of bikes and cars, potentially making them up to ₹1 lakh cheaper. This could be a major boost for first-time buyers and price-sensitive consumers. It is predicted that demand for entry-level passenger vehicles and two-wheelers should increase as a result of the price elasticity and a weak base.

Rationale and Objectives

The GST Council's decision to restructure tax rates reflects a broader strategy to boost the automobile sector, simplify the tax structure, and promote mass mobility. By reducing the tax burden on smaller vehicles, the government aims to make personal transportation more accessible to the average Indian buyer. At the same time, the higher tax rate on luxury vehicles is intended to generate revenue and discourage the consumption of "sin goods". The changes align with Prime Minister Narendra Modi's announcement of a GST overhaul and the rationalization of tax slabs.