GST Rate Cuts Make Small Cars, SUVs, and Two-Wheelers More Affordable This Festival Season, ETAuto

The SUV segment has been on fire these last couple of years, now accounting for more than a third of the passenger vehicle market. The Diwali bonanza promised by the Prime Minister has become a reality, with the GST rate on small cars, two and three wheelers being slashed by 10 percentage points to 18 per cent . In its meeting on Wednesday, the GST Council decided to collapse the rate slabs to just 5 per cent , 18 per cent and 40 per cent (for luxury or sin goods). This means small cars and two wheelers up to 350 cc engine capacity will likely become cheaper.

There is some cheer for large cars and SUVs too since the total tax incidence would be lower in the new regime. Earlier, this segment of vehicles was eligible for 28 per cent GST plus cess of 15-22 per cent , taking up total tax payable to 50 per cent in some categories. This has now become a uniform 40 per cent .

With the new regime expected to kick in before the navaratra period – typically a high sales volume season for the automobile industry – the footfalls and retail numbers are expected to pick up later this month across vehicle showrooms. The only thing to watch out for would be whether the entire GST rate cut benefit is passed on to the consumers by OEMs.

The only vehicle category which has lost out during the GST rate rationalisation exercise is the above 350 cc two wheeler segment, where effective GST rate of 31 per cent (28 per cent plus 3 per cent cess) has moved to 40 per cent .

Siddhartha Lal, Chairman at Royal Enfield has in fact issued a public appeal last week, referring to the make-in-India initiative of the two wheeler industry and seeking the lower GST rate of 18 per cent . It is not clear whether the industry will continue to push for lower GST rates for this segment of two wheelers, with one industry veteran saying “it is too late now for seeking more changes. Let’s see”.

SUV Rush

The SUV segment has been on fire these last couple of years, now accounting for more than a third of the passenger vehicle market. Within this segment, the entry level vehicles continue quality as small cars because they are under four meters long and have either 1200 cc petrol or 1500 cc diesel engine. So a Tata Punch (one of the biggest selling cars) is an entry level SUV, so is Hyundai Exter. All of these vehicles will get the ten percentage point tax benefit and may become cheaper this festival season.

The mid sized and premium end of the SUV market – with fast movers such as Hyundai Creta and the newly launched Maruti Victoris – are also expected to get slightly cheaper because of the lower 40 per cent effective rate.

Saurabh Agarwal, Partner & Automotive Tax Leader, EY welcomed the GST rationalistion, saying that this move will not only boost consumer spending but also simplify complex classification disputes that have long burdened the industry. “The discontinuance of the cess is a particularly pragmatic step, which will provide much-needed support to a sector that is a vital contributor to our nation’s GDP.”

Small car puzzle

It is a sentiment booster for sure and will likely increase footfalls during the festival season across automobile showrooms. But will the GST reduction actually increase sales of small cars and two wheelers less than 350 cc in any substantial number and on a sustained basis? Maybe not.

The decline in sales of these vehicle categories has been ongoing despite significant dealer discounts currently on offer – some dealers peg the discounts on small cars at anywhere between Rs 50,000 to Rs 75,000 currently, pointing to rising inventories. But this has not moved the needle in any noticeable manner. So while a steep GST cut will help, perhaps an overall economic boost, which generates better rural and urban incomes and an all round growth, would be a better bet to kickstart sales of these categories of vehicles. Anyway, with the ongoing premiumisation trend in the vehicle market, customers prefer compact SUVs and SUVs to small cars.

Maruti, Mahindra cheer

R C Bhargava, Chairman at Maruti Suzuki India, had told ETAuto earlier that “lower GST rates, if they happen, will certainly help the segment since small cars will then become more affordable”. He also dismissed dealer talk of ongoing hefty discounts on small cars, saying “I do not think there is a regular discount on small cars at all”.

A small car is defined as a sub-four meter vehicle with either 1200 cc petrol or 1500 cc diesel engine displacement. Vinkesh Gulati, former FADA president, had said earlier that many customers might have skipped buying a new vehicle, or settled for a used one, but this incentive (GST reduction) “gives them the confidence and excitement to finally own a new car.”

Rajesh Jejurikar, ED and CEO (Auto and Farm Sector) for Mahindra and Mahindra said the “landmark GST rationalisation” will have a far reaching positive impact across the automotive and farming sectors. He said tractors and farm machinery will become much more affordable.

Dealers, experts remain cautious

A former dealer for Tata Motors had said that rising inventory levels across dealerships has already prompted hefty discounts of up to ₹75,000 on small cars. “The GST cut will boost sales for a short period but I do not see any long term sales uptick”. The car models which could become cheaper in case of a GST reduction include Alto, Swift, Dzire, Fronx and Baleno from Maruti Suzuki India; Xcent and i10 from Hyundai Motor India and the Tiago from Tata Motors.

Implementation issues

Agarwal of EY pointed to the financial impact of state incentives and subsidies which are currently linked to GST rates. “This may necessitate a renegotiation with state governments to address potential changes in costs and clawback periods,” he warned.

• Published On Sep 4, 2025 at 09:23 AM IST

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