GST reforms may lift auto demand but dent festive cheer
The auto sector is expected to reap significant benefits from the new tax regime, especially small cars, which have seen a steep decline in the last decade
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Sep 02, 2025, 13:33 IST4 min
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There is a silver lining for India’s car buyers. The only problem is that it might dampen the festive sales.
During his address to the nation on Independence Day, Prime Minister Narendra Modi announced that the government was ready to reduce the rate of the Goods & Services Tax (GST). “I am going to make it a double Diwali for you,” Modi said. “We are coming with the next generation of GST reforms, which will be a gift for you. Taxes for the common man will be reduced substantially, and a lot of facilities will be increased.”
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Under a new plan approved by a six-member Group of Ministers (GoM), GST will now comprise only two slabs: 5 percent and 18 percent. Currently, GST is levied at four rates: 5 percent, 12 percent, 18 percent, and 28 percent. A 40 percent levy will be imposed on ‘sin goods’ such as tobacco and certain luxury items, including luxury cars.
The auto sector is expected to reap significant benefits from the new tax regime. It’s also likely to give a boost to the sales of small cars, which have seen a steep decline in the last decade. According to the Society of Indian Automobile Manufacturers (SIAM), domestic sales in the mini segment (cars measuring up to 3.6 metres in length) declined from 460,772 in FY19 to 152,262 in FY24 and 133,397 in FY25, representing a drop of over 70 percent in six years.
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“Today, most passenger vehicles sit in the 28 percent GST slab, with a compensation cess up to 22 percent, depending on dimensions/engine capacity, creating an effective tax incidence that can exceed 40 percent,” says Harshvardhan Sharma, group head -auto tech and innovation at Nomura Research Institute. Electric vehicles (EV) attract 5 percent GST.
With almost 65 percent of the market now shifting towards the larger SUV segment, affordability at the entry level remains a significant concern, something that the country’s largest automaker, Maruti Suzuki, has repeatedly highlighted. “What is happening is that people can’t afford small cars. Smaller and cheaper cars have become unaffordable because of the high cost of implementing regulatory measures,” RC Bhargava, chairman of Maruti Suzuki, said during the company’s earnings call in June. The ex-showroom price of a new Maruti Alto K10 in New Delhi, for instance, increased from Rs 3.4 lakh in 2019 to Rs 4.23 lakh in 2025, a 25 percent rise.
“If the council adopts 18 percent GST for small ICE (internal combustion engine) cars, unit economics would improve immediately through a lower ex-factory tax burden,” adds Sharma. “In price-sensitive entry segments, OEMs (original equipment manufacturers) typically pursue a partial pass-through—enough to widen the addressable market without fully eroding margin.”
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Brokerage group Nomura estimates the GST reduction could have a multiplier effect of 1 to 1.5 times, translating into a 5 to 10 percent increase in demand across various segments. Popular models, such as the Wagon R, could see a 9 percent drop in prices, while the Mahindra Bolero will see a 10 percent reduction. Mahindra’s XUV 700 is likely to become cheaper by 7 percent, while Maruti Suzuki’s Brezza and Hyundai’s Creta could see a 3 percent reduction.
“Even a modest easing in mid-segments (compact SUVs) alongside a sharper cut for small cars would narrow the gap between entry hatchbacks and compact SUVs, affecting substitution patterns at the margin,” adds Sharma of Nomura. “Final outcomes depend on cess calibration and category definitions.”
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The decision to reduce GST will also have a significant impact on two-wheeler sales, with a 10 percent reduction in taxes. However, with the announcement coming ahead of the festive season, which accounts for between 30 percent and 35 percent of annual sales, it is almost certain that buyers will hold off on their purchases until the new slabs come into effect. As a result, it would hurt sales during the festive season.
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The slow death of small cars “Customers are unlikely to buy vehicles before this move in anticipation of the rate cut,” brokerage firm Motilal Oswal said in a report. “At a time when OEMs were looking to push dealer stock in anticipation of a demand revival in the festive season, this move is likely to put OEMs in a spot in the interim.”
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Automotive sales have been weak in the first four months of the current fiscal. Sales of two-wheelers are down 4 percent on a year-on-year basis, while passenger vehicle sales are down 1 percent. Commercial vehicle sales have remained flat, underscoring the need for reforms to stimulate sales. “On balance, lowering GST on small ICE cars to 18 percent within a simplified, two-rate structure would improve affordability, expand first-time ownership, and support MSME supplier resilience, without materially disturbing EV policy continuity,” adds Sharma. “The cascading effects of healthier dealer working capital, improved insurance adoption, and better utilisation of legacy capacity should strengthen the sector’s operating cadence, provided the cess architecture preserves fiscal stability and the council’s implementation is timely and predictable.”
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