Will the proposed GST reforms make cars and SUVs cheaper in India? Here’s what to now

The Indian government is proposing a major overhaul on the Goods and Services Tax (GST) structure, which will largely impact the automobile industry.

The GST on automobiles – currently in the highest tax bracket of 28 per cent – will be restructured to resolve classification disputes related to engine capacity and vehicle size, ultimately benefiting the buyers, according to government sources known to PTI.

Current tax structure for vehicles?

Currently, most automobiles are taxed at 28 per cent. On top of that, a compensation cess, ranging from 1 to 22 per cent is applied, depending on the type of vehicle.

This leads to a wide range of total tax incidence on cars, from as low as 29 per cent for small petrol cars to as high as 50 per cent for SUVs. This complex system led to frequent classification disputes. In contrast, electric vehicles (EV) are currently taxed at a much lower rate of 5 per cent.

Sources told PTI that as the center proposed moving the GST system to a two-tier rate structure of 5 and 18 per cent and a 40 per cent slab for a select few items, automobiles will also be placed in a slab to put an end to disputes arising due to the classification of cars by engine capacity and length.

What do these changes mean for car buyers?

The proposed changes are expected to boost demand and sales, as cars will become more affordable for the average consumer.

By streamlining the tax structure and potentially lowering the overall tax burden on a wide range of vehicles, the new system aims to stimulate consumption and strengthen the economy as a key part of the government’s growth strategy.

The exact new GST rate for automobiles is yet to be finalized by the government.

The road ahead for GST reforms

The center’s proposal, which includes eliminating the 12 and 28 per cent slab, will be discussed by the Group of Ministers (GoM) on GST rate rationalization on August 21, 2025. Following this, the GST Council, which includes the finance ministers from both the central and state governments, is expected to meet next month and approve the final GST rate structure.

Currently, GST is a four slab structure of 5, 12, 18 and 28 per cent, where essential items are either taxed at nil or a 5 per cent rate and luxury and sin goods are at 28 per cent slab. The Centre has proposed to the rate rationalization GoM to have only 2 slabs in GST — 5 and 18 per cent and a separate 40 per cent rate only for a select few goods.

Sources also told PTI that the 40 per cent rate would apply to 5-7 goods only, most likely in the luxury and sin goods category.

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