The Indian automobile industry could soon witness its biggest tax reform in nearly a decade, with reports suggesting that the government is considering reducing Goods and Services Tax (GST) on small cars from the current 28 percent to 18 percent. The proposal, if implemented, is expected to take effect around Diwali and would mark a significant step in making entry-level cars more affordable.
Focus on Common Man’s Mobility
The move comes on the back of Prime Minister Narendra Modi’s Independence Day address, where he hinted at “next-generation GST reforms” that would ease the burden on essential goods and services. While he did not mention the auto sector specifically, government officials have indicated that passenger vehicles—particularly small cars—are at the center of the reform.
Currently, small cars—typically with engines under 1,200cc and a length of up to four metres—make up about one-third of the 4.3 million cars sold in India during the last financial year. Despite their dominance in volumes, affordability has been eroded in recent years due to stricter safety regulations, upgraded emission norms, and inflationary cost pressures.
Carmakers That Stand to Gain
If the tax cut goes through, automakers such as Maruti Suzuki, Tata Motors, and Hyundai Motor India are expected to benefit the most. More than 60 percent of their sales come from compact, budget-friendly cars. For example, India’s most affordable car today—the Maruti Alto K10—starts at ₹4.23 lakh (ex-showroom, Delhi).
Maruti Suzuki chairman R. C. Bhargava has repeatedly highlighted that high ownership costs and muted demand have slowed industry growth. Over the past six years, car sales have expanded at an average pace of just 4.4 percent, with FY25 seeing only a 2 percent year-on-year increase. The industry is forecasting another sluggish year, with projected growth between 1 and 4 percent.
What About Bigger Cars?
While small cars may get a breather, larger vehicles with bigger engines could see a restructured tax system. At present, these attract 28 percent GST plus a compensation cess of up to 22 percent—taking the effective rate close to 50 percent. Sources suggest that the government may introduce a new special slab of around 40 percent GST for bigger engines, with additional levies to ensure that the overall burden remains within the 43–50 percent band.
Insurance Premiums Under Review Too
Apart from cars, the government is also considering a ceiling of 5 percent GST on insurance premiums, a move that would benefit vehicle buyers as well as policyholders across sectors.
What This Means for Buyers
If approved, the GST cut could translate into a substantial price drop for hatchbacks and entry-level sedans, boosting demand in a segment that has seen its affordability advantage shrink in recent years. With car penetration in India still among the lowest globally, industry experts believe the proposed reforms could reignite consumer interest and drive long-term growth.
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