GST reforms in India will boost sluggish sales in entry-level cars

The Goods and Services Tax (GST) reforms in automobiles and automobile parts will provide a direct impetus to demand in entry-level mobility segments where sales have been sluggish, and make compliance easier, a report has said.

“The uniform 18 per cent rate on auto parts simultaneously addresses compliance complexity and reduces lifecycle maintenance costs, benefitting both consumers and vendors,” a report from Grant Thornton Bharat said.

The government has restructured the GST for India’s automobile sector effective from September 22, 2025. Entry-level vehicles and parts will now be taxed at a lower rate of 18 per cent from earlier 28 per cent.

The larger cars and luxury models will face a 40 per cent tax rate up from 28 per cent, but the cess on them has been completely removed, dropping the effective tax incidence lower.

By consolidating small cars (petrol up to 1200 cc, diesel up to 1500 cc, length not exceeding 4 metres), small hybrids, two wheelers up to 350 cc, three-wheelers, and goods vehicles into the 18 per cent bracket, the GST Council has reduced the effective incidence from nearly 29-31 per cent (including cess) to a uniform 18 per cent.

The reduced rate is also applicable to ambulances, goods carriers, buses, and factory-fitted hybrids with smaller engine sizes. Auto parts, chassis, accessories, and tires will shift to 18 per cent from the current 28 per cent rate, simplifying compliance and reducing lifecycle costs.

Seats used for motor vehicles, Spark-ignition also got shifted from 28 per cent to 18 per cent slab. Tractors, trailers and fuel-cell hydrogen vehicles with length not exceeding 4 metres got shifted from 12 per cent GST slab to 5 per cent GST slab.

The new structure ensures that price-sensitive buyers experience tangible relief through upfront cost reductions, while fleet operators and logistics providers can gain through admissible ITC and faster refunds, strengthening liquidity and replacement cycles, the report noted.

These reforms pave the way for a more efficient, affordable, and business-friendly GST system, fostering economic growth, enhancing ease of doing business, the report noted.

An Indian tax panel has proposed steep increases in consumer levies on luxury electric cars priced above $46,000, a government document showed, a move that could impact sales of carmakers such as Tesla, Mercedes-Benz, BMW and BYD. Prime Minister Narendra Modi is aiming to reform India’s tax system and is pushing Indians to buy more domestic goods just when relations with the United States have soured due to high tariffs. His government has recommended hefty cuts in the goods and services tax (GST) that could make everything from shampoos to electronics cheaper.

The key panel tasked with making rate suggestions to India’s powerful GST Council has backed sweeping cuts to many items in line with Modi’s overhaul, but it has called for raising taxes on electric cars, the document detailing its recommendations showed.

The panel recommended raising the GST rate to 18 per cent from 5% currently for EVs priced between 2 million and 4 million rupees ($23,000-$46,000). It also proposed hiking the tax to 28% for cars priced above $46,000, saying that such vehicles cater to the “upper segment” of society and are largely imported rather than manufactured domestically.

But Modi’s government has simultaneously decided to do away with the 28% tax rate altogether, leaving the GST Council with the option to increase the tax on EVs to 18%, or put them in the newly planned 40% category carved out for certain luxury goods, said an Indian government source familiar with the discussions. India’s GST Council - led by the federal finance minister and which has members from all Indian states - is meeting on September 3-4 to review the proposals, and has the ultimate authority on decision-making.

The secretariat of the GST Council did not respond to Reuters queries.

After the Reuters story, the Nifty Auto index turned negative and fell as much as 0.5%, with local automakers Mahindra and Mahindra falling almost 3% and Tata Motors dropping 1.2%.

India’s EV market is small, making up about 5% of total cars sold in April to July this year, but growth in the segment has been rapid: EV car sales in India rose 93% to 15,500 units during that period.

“The uptake of electric vehicles is increasing and while, the low rate of 5% is to incentivise faster adoption of electric vehicles, it is also important to signal that higher-priced EVs can be taxed at higher rates,” said the document, detailing the tax panel’s recommendations.

The proposal could affect domestic EV makers such as Mahindra and Tata Motors, though their offerings above the 2 million rupee price range are limited.

Reuters