Big engines, bigger taxes: GST 2.0 hikes duty on luxury cars to 40%

By Pune Media On Sep 3, 2025

The Goods and Services Tax (GST) overhaul announced by Prime Minister Narendra Modi last month is now officially in force, bringing major changes to India’s automobile taxation. Small petrol and diesel cars are set to benefit from rate cuts, but luxury vehicles and high-end electric cars will now face higher levies, reshaping costs for premium buyers.

Under the new rules, cars longer than four metres with petrol engines above 1,200cc or diesel engines above 1,500cc are classified as “luxury goods” and will attract a 40% GST.

To offset some of the impact, the additional cess previously applied to these vehicles, ranging from 15% to 22%, has been reduced, keeping the total tax burden around 50%.

Read Also | GST 2.0 gets the green light; what gets cheaper and costlier from September 22?

This adjustment means that while the headline GST rises sharply, the reduction in cess slightly moderates the net increase. Depending on engine size, fuel type, and body style, these larger vehicles will see a smaller overall tax revision compared with the steep cuts applied to sub-4m cars.

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The GST changes are part of the transition to “GST 2.0,” a simplified two-slab system of 5% and 18%, with a special 40% slab reserved for sin and luxury goods. The reform also includes the planned abolition of the compensation cess, expected by October 31, which will simplify compliance for manufacturers and dealers.

GST rejig: Small cars, bikes under 350cc get tax cut to 18%; SUVs, big bikes, yachts hit with 40% slab

The Goods and Services Tax (GST) Council has approved a sharp hike in rates for sin goods, moving them from the earlier 28% slab to a new 40% rate. This comes as part of the transition to “GST 2.0,” a simplified two-slab structure that will feature just 5% and 18% rates, with the higher 40% reserved for sin and luxury items.These changes are expected to roll out by September 22 2025. The Council has said tobacco products will continue at current GST + cess until the Compensation Cess loans are fully discharged, after which they will migrate into the 40% slab.

How the old GST structure worked

Prior to the reform, all passenger vehicles except EVs were taxed at a uniform 28% GST, with an additional cess ranging from 1% to 22%, depending on engine size, fuel type, and body configuration. Electric vehicles alone benefited from a 5% GST.

Vehicle category	GST	Cess	Total tax payable
Sub-4m petrol up to 1200cc	28%	1%	29%
Sub-4m diesel up to 1500cc	28%	3%	31%
Cars up to 1500cc	28%	17%	45%
Cars above 1500cc	28%	20%	48%
SUVs (above 4m, above 1500cc, >170mm GC)	28%	22%	50%
Sub-4m hybrids	28%	Nil	28%
Hybrids above 1200cc petrol / 1500cc diesel	28%	15%	43%
Electric vehicles	5%	Nil	5%

Market impact

The GST reform is expected to boost sub-4m petrol and diesel car sales, offering relief to buyers during the festive season and reversing declines caused by rising prices and the growing popularity of used cars. Two-wheelers and compact vehicles are also likely to benefit from lower GST rates.

Read Also | GST Council slashes tax slabs to two to spur consumption; announces key measures for middle class

Luxury and premium EVs, however, face higher taxes, which could slow growth in India’s high-end electric segment. Tesla, for instance, plans to ship only 350-500 units to India this year, despite its global scale, and BYD has sold 10,000 luxury EVs since 2021. The revised GST could further affect demand for these imported models.

Midsize and large vehicles, including traditional luxury cars, are less affected in net tax terms but will still feel the impact of higher headline GST.

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