On Independence Day 2025, Prime Minister Narendra Modi announced a major GST reform aimed at simplifying India’s complex four-slab system into a two-slab structure. This landmark tax change is set to impact nearly 175 products, including automobiles, according to Reuters. The GST Council, led by Finance Minister Nirmala Sitharaman and comprising state representatives, will meet on September 3-4 to finalise the new structure, determine which items fall under the revised slabs, and clarify the exact tax rates.
For the automotive industry, especially the small car segment, this reform could prove transformative. A proposed 10-percentage-point cut in GST for small cars could make them significantly more affordable. However, in the short term, several automakers have reported a slowdown in sales as buyers postpone purchases in anticipation of lower prices ahead of the festive season.
Existing GST on Cars in India
Currently, all passenger vehicles (except EVs) attract a uniform 28% GST, along with a varying cess ranging from 1% to 22% depending on engine capacity, vehicle size, and body type. Here’s a simplified breakdown:
| Vehicle Category | GST | Cess | Total Tax Payable |
|---|---|---|---|
| Sub-4m, petrol ≤1200cc | 28% | 1% | 29% |
| Sub-4m, diesel ≤1500cc | 28% | 3% | 31% |
| All cars ≤1500cc | 28% | 17% | 45% |
| Cars >1500cc | 28% | 20% | 48% |
| SUVs (>4m, >1500cc, >170mm GC) | 28% | 22% | 50% |
| Sub-4m hybrids | 28% | Nil | 28% |
| Hybrids >1200cc petrol / >1500cc diesel | 28% | 15% | 43% |
| Electric vehicles (EVs) | 5% | Nil | 5% |
How Will Small Car Prices Be Affected?
Small cars are expected to benefit the most from the upcoming GST reform.
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Proposed GST cut: 28% → 18% for sub-4m vehicles with small petrol and diesel engines.
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Cess elimination: Current 1–3% cess could be scrapped.
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Effective reduction: 11–13 percentage points lower taxation.
This means popular hatchbacks and compact sedans could become more affordable, giving a much-needed push to the entry-level car segment that has been struggling due to rising costs and competition from used cars.
What About Larger Cars and SUVs?
While small cars may see tax cuts, larger cars and SUVs are likely to face a higher GST rate:
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GST may rise to 40% for vehicles above 4m with larger engines.
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However, the cess (currently 15–22%) will be reduced to ensure the overall effective tax remains around 50%.
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The net change will be minor compared to small cars, meaning luxury cars and SUVs won’t see significant price cuts.
How Will Electric Vehicle (EV) Prices Be Impacted?
In a surprising twist, the reform could increase EV prices, especially in the premium category:
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EVs priced between ₹20–40 lakh: GST may jump from 5% → 18%.
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EVs above ₹40 lakh: Could move into an even higher GST slab.
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Impact: Homegrown premium EVs (like Tata Harrier EV, Mahindra XUV 9e) and global models (Mercedes, BMW, Tesla) will likely become more expensive.
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Entry-level EVs: No clarity yet, but the government may continue offering incentives to support mass adoption.
Key Takeaways: Winners and Losers
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Biggest Winners: Small petrol and diesel cars (sub-4m) – tax cut could boost affordability and sales.
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Neutral Impact: Midsize and large cars – GST rise offset by cess reduction, keeping overall rates stable.
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Losers: Premium and luxury EVs – higher GST could slow their sales momentum.
Conclusion
The upcoming GST reform could reshape the Indian car market. Small cars will likely see the sharpest price reductions, potentially reviving sales in a segment that has been losing ground. Meanwhile, luxury cars and SUVs will remain relatively unaffected, and premium EVs could become costlier, possibly slowing down adoption in the upper segment.
For buyers, the timing of this reform is crucial. With festive season around the corner, many are waiting for official confirmation before making a purchase decision.
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