GST Cut on Small Cars in India: Relief Ahead of Diwali?

India is poised for a significant tax reform that could herald a festive relief for the common buyer and a revival for the struggling small-car segment. As part of a sweeping overhaul of the Goods and Services Tax (GST), the government is proposing to reduce the GST rate on small cars from the current 28% to 18%. This move, expected to be announced around Diwali in October, could unlock new affordability and demand—especially for leading brands such as Maruti Suzuki, Hyundai, and Tata Motors.

1. What’s Changing: GST Slashes for Small Cars

The central government has proposed reducing the GST applicable to small petrol and diesel cars from 28% down to 18%, a substantial cut designed to make these vehicles more affordable. Reports suggest this is part of shifting to a simplified two-slab GST system of 5% and 18%, while removing the existing 12% and 28% levels altogether.

1.1 Definition of “Small Cars”

Under the proposal, small cars are defined as petrol vehicles with engines up to 1,200cc, diesel up to 1,500cc, and length not exceeding 4 metres.

1.2 When Will It Come Into Effect?

The reforms are expected to be announced just before Diwali—India’s biggest shopping season—likely in October. However, final approval hinges on the decision of the GST Council and a preceding Group of Ministers (GoM) review.

2. Why It Matters: Impact on Buyers, Automakers, and the Market

2.1 Relief for Consumers

For the middle class, a 10-percentage-point cut in GST could translate into a 12–12.5% reduction in ex-showroom prices of eligible small cars. This is significant, especially for budget-conscious buyers eyeing models like Maruti Alto, Wagon-R, or Hyundai’s entry-level hatchbacks.

2.2 Boost for Automakers

Small-car sales have declined—accounting for only one-third of passenger vehicle volumes in the past fiscal, down from nearly half pre-COVID. The GST cut would offer a timely boost to sales volumes. Maruti Suzuki would likely benefit most, as the segment still forms around 50% of its total volumes and has seen a drop in market share from 50% to about 40%. Hyundai and Tata Motors are also expected to reap gains.

2.3 Market Response and Investor Sentiment

Announcements around the GST overhaul drove sharp gains in the stock market. Auto and consumer goods stocks surged, with the auto index jumping nearly 5%—marking the sector’s strongest performance in months.

A broader shift to just two GST slabs (5% and 18%), along with a special 40% slab for sin goods, could significantly lower prices across daily-use and discretionary items—potentially boosting FMCG and consumer sentiment.

3. Broader GST Reform and Implications

3.1 Two-Rate GST and Sin-Goods Slab

The proposed reform aims to move away from the four-slab system (5%, 12%, 18%, 28%) toward a streamlined 5%–18% structure, with a 40% special rate for sin and luxury goods.

3.2 Other Beneficiaries: Insurance, ACs, and Appliances

• Insurance premiums: There’s a proposal to reduce GST on life and health insurance from 18% to 5% or even zero, potentially making coverage more affordable.
• Durable goods: Items like air conditioners, televisions, and other appliances currently under 28% may also be reclassified under 18%—making them more accessible.
• Daily essentials: Many common FMCG items—such as butter, packaged juices, noodles, cheese—may be moved from 12% down to 5%.

3.3 EV Sector: A Double-Edged Sword?

Electric vehicles (EVs) currently benefit from a concessional 5% GST. If internal-combustion engine vehicles are taxed only 18%, the cost gap narrows—possibly weakening the incentive for EV adoption.

4. What’s Next: Timeline and Key Decisions

Conclusion

India’s proposed GST reforms represent the most sweeping tax change since 2017, with a promising 10-point cut on small car GST likely to translate into substantial price relief. If approved by the GoM and later the GST Council—possibly ahead of Diwali—this could revive small-car demand, offer consumers welcome affordability, and energize the auto and FMCG sectors alike.

Stay tuned: the coming weeks are critical. Final approval will define whether this tax reform becomes a festive boon or a missed opportunity.