New Delhi | Small car prices can come down by up to Rs 1 lakh due to the GST rate cut on the auto sector, leading to demand revival, especially in smaller cities and towns, amid the ongoing festive season, industry observers said on Thursday.
The GST rationalisation is expected to revive demand in the entry-level segment, which was gradually losing its grip in the Indian passenger vehicle market.
The segment accounted for just 31 per cent of the total PV sales in FY 2024-25 and the share has further slipped to 27 per cent between the April-July period of 2025.
"The rate cut could significantly lower acquisition costs by up to Rs 1 lakh (accounting for a 12 per cent drop in process), which is expected to revive demand, especially in Tier 2 and Tier 3 cities, with the festive season approaching," Grant Thornton Bharat Partner Saket Mehra said in a statement.
In contrast, midsize and luxury vehicles will now attract a GST rate of 40 per cent without the compensation cess, ranging between 17-22 per cent, making these vehicles cheaper, despite moving to a higher GST rate.
The GST Council's decision to cut tax rates on various categories of automobiles is timely and will inject fresh momentum into the Indian automotive sector and significantly benefit first-time buyers and middle-income families, auto industry players said.
The simplification of tax structure and lower rates for mass mobility is a decisive step that will boost affordability and spur demand, they said, while also hoping that the government will soon notify suitable mechanisms for the utilisation of compensation cess on unsold vehicles, ensuring a smooth and effective transition.
Society of India Automobile Manufacturers (SIAM) President Shailesh Chandra said the automobile industry welcomes the government's decision to reduce the GST on vehicles to 18 per cent and 40 per cent, especially in this festive season.
Further, he said, "This timely move is set to bring renewed cheer to consumers and inject fresh momentum into the Indian automotive sector.
"Making vehicles more affordable, particularly in the entry-level segment, these announcements will significantly benefit first-time buyers and middle-income families, enabling broader access to personal mobility."
Expressing similar sentiments, Federation of Automobile Dealers' Associations (FADA) President C S Vigneshwar said the "bold and progressive reforms" simplify the tax structure, lower rates for mass mobility, and bring consensus across all states.
"This is a decisive step that will boost affordability, spur demand, and make India's mobility ecosystem stronger and more inclusive," he said, adding, "as the country heads into the peak festive season, glitch-free and implementation will be the key to ensuring that the benefits seamlessly reach customers".
TVS Motor Company Chairman Sudarshan Venu said the GST rate cut is a major move by the government to further turbocharge growth. "It will significantly boost consumption across segments of society.”
Chandra also welcomed the continuation of the GST rate of 5 per cent on electric vehicles, saying that it "will help sustain the ongoing momentum towards sustainable mobility".
He also noted that the auto industry is "confident that the government will also soon notify suitable mechanisms for the utilisation of compensation cess on unsold vehicles, ensuring a smooth and effective transition".
Likewise, Vigneshwar said, "One area that may need the earliest clarification is about levy and treatment of cess balances currently lying in dealers' books, so that there is no ambiguity during transition."
The relief extended to smaller vehicles, along with the rationalisation of levies on larger ones, will enhance mobility for the common man by making it more accessible and affordable, while at the same time stimulating growth across the automotive sector, Toyota Kirloskar Motor Deputy Managing Director Swapnesh R Maru said.
The 40 per cent GST on premium cars without any additional cess is good news for the premium car industry and will drive new sales. The uniform rate of 18 per cent for auto parts will also have a good impact on supply chain and demand for high-quality original parts, said BMW Group India President and CEO Hardeep Singh Brar.
"However, the increase in GST to 40 per cent for motorcycles above 350cc will have a negative impact on the mid-segment and high-end segment models, which have been seeing good growth for the past few years," he added.
Hyundai Motor India MD Unsoo Kim said the GST overhaul will directly benefit the automotive sector.
"Notably, 60 per cent of our ICE portfolio will now fall under the 18 per cent slab rate, with the remainder at 40 per cent," he added.
The rationalised GST will ease household expenses, fuel consumption, and create a multiplier effect on long-term economic growth.
Renault India MD Venkatram Mamillapalle said the rationalised GST will ease household expenses, fuel consumption, and create a multiplier effect on long-term economic growth.
The GST reform will spur freight traffic, and on the other hand, it will bring down the cost of buses and trucks, unleashing demand trajectory for commercial vehicles, said Ashok Leyland MD & CEO Shenu Agarwal.
The GST Council on Wednesday approved limiting slabs to 5 per cent and 18 per cent, effective from September 22, the first day of Navaratri.
Under it, petrol, LPG and CNG vehicles of less than 1,200 cc and not more than 4,000 mm length and diesel vehicles of up to 1,500 cc and 4,000 mm length would move to the 18 per cent rate.
Earlier, these two categories attracted 28 per cent GST with compensation cess of 1 per cent, and 28 per cent GST with 3 per cent compensation cess, respectively.
Motorcycles up to 350 cc would be taxed at a lower GST of 18 per cent against 28 per cent earlier.
All automobiles exceeding 1,200 cc and longer than 4,000 mm, as well as motorcycles exceeding 350 cc and racing cars, will be charged with a 40 per cent levy.
Small hybrid cars will also benefit, while EVs will continue to be charged at 5 per cent.
