Car Prices Set To Drop With GST Cuts The GST rationalisation represents a bold step toward cost rationalisation and structural simplification across the auto ecosystem
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The recent GST rationalisation announced by the government marks a significant turning point for the Indian automotive industry, aimed at simplifying taxation and improving affordability across key segments. One of the most impactful changes is the reduction of GST on small cars from 28 per cent to 18 per cent applicable to petrol, diesel and hybrids within the prescribed limits of 1,200cc & 4 m for petrol and 1,500cc & 4 m for diesel.
"This move is expected to revive demand in the entry-level segment, which was gradually losing its grip in the Indian PV market (from making up for 31 per cent of total PV sales in FY 2024-2025, to 27 per cent of PV sales between April- July 2025). The rate cut could significantly lower acquisition costs by up to INR 1 lakh (accounting for ~12 per cent drop in process) which is expected to revive demand, especially in Tier II and Tier III cities, with the festive season approaching," said Saket Mehra, partner, Grant Thornton Bharat.
In contrast, midsize and luxury vehicles defined as those exceeding 4 m in length or engine capacities above 1,200cc (petrol) or 1,500cc (diesel) will now attract a GST rate of 40 per cent without the compensation cess. With the expiry of cess ranging from 17-22 per cent on such cars, these vehicles will get cheaper, despite moving to a higher GST rate.
"The 40 per cent slab for premium and luxury vehicles provides clarity and simplifies taxation, helping customers make informed choices with greater confidence. With a diverse portfolio spanning Škoda and Volkswagen to Audi, Porsche, Lamborghini and Bentley, we recognise the significance of reforms that balance accessibility with aspiration. Such reforms have the potential to strengthen market sentiment, encourage demand across segments, and create a more conducive environment for long-term growth," said Piyush Arora, CEO and MD, Škoda Auto Volkswagen India Pvt Ltd.
The two-wheeler segment also sees a bifurcation. Motorcycles with engine capacities below 350cc will benefit from a reduced GST rate of 18 per cent, down from 28 per cent, improving affordability for mass-market buyers. However, motorcycles exceeding 350cc—typically in the premium and leisure category -- will attract the highest slab of 40 per cent, "This could raise prices for models in the mid- and high-capacity range and slow growth in this aspirational segment. The GST rationalisation represents a bold step toward cost rationalisation and structural simplification across the auto ecosystem," said Sachin Sharma, partner, Grant Thornton Bharat.
"For our industry especially, it's a welcome move as it will help two-wheelers become more accessible and also help those looking to upgrade," said Sudarshan Venu, chairman, TVS Motor Company.
The GST Council's decision to retain the 5 per cent GST rate on electric vehicles is a forward-looking move that reinforces India's commitment to sustainable, zero-emission mobility and signals long term policy stability.
"The reduction of GST on small cars to 18 per cent further expands access to personal mobility, making it more affordable for a broader section of society. Together, these measures will not only accelerate EV adoption but also drive innovation, strengthen domestic manufacturing, and propel India toward a cleaner, smarter, and self-reliant mobility future," said Shailesh Chandra, MD, Tata Motors Passenger Vehicles Ltd. and Tata Passenger Electric Mobility Ltd.
The move makes tractors and farm machinery more affordable for farmers, reduces costs for commercial vehicles and improves accessibility for personal mobility through rationalisation of rates across all SUVs. "Together, these measures are expected to stimulate demand, and drive inclusive growth across the entire ecosystem. We also appreciate the continuation of the 5 per cent GST rate on EVs, which is a critical enabler of India's clean mobility vision. This measure will further accelerate the adoption of electric vehicles and reinforce India's leadership in sustainable, green transportation," said Rajesh Jejurikar ED & CEO - Auto and Farm Sector, M&M.
