GST 2.0: Single tax rate for small cars, SUVs & Hybrids on the cards? Maruti Suzuki poised for big gains – Industry News

In news that is bringing a lot of cheer for auto companies, the government may propose reducing GST on small cars  to 12 per cent from 28 per cent. Citing sources, Reuters also highlighted that bigger cars, which are currently taxed upwards of 28 per cent and with total tax burden close to 50 per cent, may now come under a new 40 per cent slab, with additional levies. However, there is no clear indication about the proposed tax on hybrids.

The change in GST rates for vehicles is part of the broader plan announced by Prime Minister Narendra Modi on Independence day. The expectation is that the tax rates are going to be streamlines into two principal slabs of 5 per cent and 18 per cent and a 40 per cent slab for a select few items,scrapping 12 per cent and 28 per cent GST on certain goods and services.

Current GST structure: Automobiles faces highest GST slab; EVs enjoy lowest GST rate

At present, automobiles fall under the highest 28 per cent GST slab. Over and above this, a compensation cess of 1 to 22 per cent is imposed, depending on the type of vehicle. This takes the total tax incidence to anywhere between 29 per cent for small petrol cars and almost 50 per cent for SUVs.

Electric vehicles are currently taxed at just 5 per cent, one of the lowest slabs in the GST structure, as the government has been pushing for faster adoption of clean mobility.

Government mulls GST cut on small cars

According to government sources cited by Reuters, GST on small cars is likely to be reduced to 18 per cent from the current 28 per cent. Small cars, defined as petrol vehicles with engines below 1200cc and diesel under 1500cc, not exceeding 4 metres in length, made up one-third of the 4.3 million passenger vehicles sold last fiscal year, down from nearly half pre-COVID. Meanwhile, bigger cars, currently taxed at nearly 50 per cent, may come under a new 40 per cent slab, with additional levies being considered to keep overall incidence intact at 43–50 per cent.

Analysts at Nomura estimate that “if tax is lowered for the auto sector by 10 per cent, it could boost demand by 15–20 per cent.” the brokerage firm noted that this shift could lower prices for consumers and revive sales momentum in the industry.

Single GST rate for small cars and SUVs under discussion

Nomura also highlighted that a single rate for both small cars and SUVs is also under discussion. Such a move could benefit SUVs, which currently attract a higher effective tax due to the additional cess. The simplification may also reduce disputes around car classification, which often arise from differences in engine size and vehicle length.

With regards to this segment, Jefferies said, “Currently taxed at 45-50 per cent (28 per cent GST + compensation cess), are unlikely to come down.”

GST cut may slow EV adoption

While the reforms will likely accelerate demand for conventional vehicles, they may prove challenging for the electric vehicle segment. EVs currently enjoy a lower GST rate of 5 per cent, but if the tax on internal combustion engine vehicles drops to 18 per cent, the price gap between ICE and EVs will narrow sharply. This could reduce the incentive for buyers to switch to electric vehicles, slowing the government’s EV adoption push.

Hybrids may narrow gap with EVs

Hybrid cars, have so far faced the same GST rate as petrol and diesel vehicles, while electric vehicles enjoy a concessional 5% GST. Any reduction in GST on hybrids could make them more attractive for cost-conscious buyers.

“If there is any GST reduction on hybrids, it could be positive for Maruti,” the report pointed out. The move may also help narrow the gap between hybrids and EVs, encouraging consumers who are hesitant about shifting fully to electric.

40 per cent slab for bigger cars considered; Maruti likely biggest beneficiary

Jefferies on the other hand said that Maruti Suzuki is likely to gain the most among carmakers if small cars move to the lower slab. “All the listed 2W makers – Bajaj, Hero, TVS and Eicher – should be beneficiaries of this cut,” the report said.

The tax cut will be a major relief for Maruti, country’s biggest carmaker, whose market share has fallen to about 40 per cent from over 50 per cent in the past five years as sales of models like Alto, Dzire and Wagon-R dropped. The segment makes up half of all cars sold by Maruti, which is majority-owned by Japan’s Suzuki Motor. Hyundai Motor India and Tata Motors are also expected to benefit.

Jefferies noted that commercial vehicles too, currently taxed at 28%, could shift to 18%, benefiting players such as Ashok Leyland, Tata Motors and Eicher.

A 40 per cent GST slab for bigger cars which is currently taxed at 28 per cent plus an additional levy of up to 22 per cent, taking total taxes to about 50 per cent. According to Reuters, officials are still working out whether additional levies should be imposed over the 40 per cent rate to keep the overall tax incidence on big cars unchanged at 43–50 per cent.

According to a report by PTI government sources said that automobiles will be placed in a slab to put an end to disputes arising due to the classification of cars by engine capacity and vehicle length.

Tractor GST rate cut may face challenges

Tractors are currently taxed at a 12 per cent GST rate, which could potentially be reduced to 5 per cent if the government removes the 12 per cent slab. However, Jefferies highlighted that this may create an inverted duty structure, “as most metals and components are at 18 per cent GST, which could limit the benefit to OEMs.” According to Jefferies, listed tractor makers Mahindra and Escorts are expected to be the main beneficiaries, though the overall impact may be moderated by higher input costs.

Auto industry braces for Diwali demand

The proposal will first be taken up by the Group of Ministers (GoM) on GST rate rationalisation on August 21. It will then go to the GST Council, which includes the Centre and state finance ministers, likely next month.

Currently, GST follows a four-slab structure of 5, 12, 18 and 28 per cent. Essential items are either exempt or taxed at 5 per cent, while luxury and sin goods attract 28 per cent and a 40 per cent rate for a few luxury or sin items. According to media reports the higher 40 per cent slab would apply to just 5-7 goods.

With consumer sentiment expected to improve around Diwali, the auto industry is preparing for a surge in demand.

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