The Indian government is reportedly considering slashing the Goods and Services Tax (GST) on small cars from the current 28% to 18%, marking what could be the automobile sector’s largest tax overhaul in nearly a decade. This potential reform, anticipated to coincide with the Diwali season, is designed to energize sales in a vital but constrained part of India’s economy.
Additionally, changes to GST on insurance premiums have been proposed, setting a maximum cap at 5%. However, the exact rollout timeline will depend on regulatory approvals and further discussions within government bodies, according to sources cited by Reuters.
Why Are GST Reforms Crucial for Small Cars?
Small cars, typically defined as vehicles shorter than 4 meters with engine capacities under 1200cc, account for approximately one-third of the 4.3 million cars sold in India during FY2025. These vehicles, which are often the choice for cost-conscious consumers, face mounting affordability challenges fueled by stricter safety and emission standards. For example, the Maruti Alto K10, India’s cheapest car, starts at Rs 4.23 lakh today.
Addressing these cost pressures, GST reductions aim to lower sticker prices, giving a much-needed boost to the automotive market. Prime Minister Narendra Modi hinted at these reforms during his Independence Day speech, noting upcoming “next-generation” GST changes to reduce taxes on items essential to the common man. While not explicitly mentioning the automotive sector, these remarks have fueled optimism in the industry.
Which Automakers Will Benefit Most?
Mass-market brands such as Maruti Suzuki, Tata Motors, and Hyundai Motor India stand to gain significantly. Collectively, these automakers derive over 60% of their sales from vehicles with engines under 1200cc. If the proposal goes through, expect a competitive pricing shift in models under this segment.
Given the current slow growth in domestic passenger vehicle sales, which rose by just 2% year-on-year in FY2025, this reform could offer manufacturers a golden opportunity to revive demand. RC Bhargava, Chairman of Maruti Suzuki, has openly stressed the critical need for supportive policies to boost the sector, citing only a 4.4% growth rate over the last six years.
What About Larger Engine Cars?
Not all segments of the automotive industry are set to see tax reductions. According to insiders referenced by Reuters, cars featuring larger engines (those exceeding 1200cc or greater length) might see a restructuring of taxes into a “special rate” of around 40%. Additional levies may bring the effective tax rate closer to the current 43-50% range.
This tiered approach aims to differentiate between mass-market vehicles and luxury or performance-oriented models, ensuring that the lowest tax rates are reserved for cars frequently purchased by middle-income families.
Will the Plan Win Approval?
While the proposed GST adjustments have generated excitement, they must pass through additional regulatory and parliamentary reviews before becoming policy. However, the timing around Diwali suggests a sense of urgency to kickstart consumer spending during the festive season, a pivotal period for retail and automotive sales.
If successfully implemented, India’s automobile sector could witness a long-awaited revival in affordability and sales momentum. Whether this change will be enough to meet the long-term growth ambitions set by industry leaders remains to be seen.
Stay tuned for further updates as the final decisions unfold.
