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GST Reform: Small Cars To Become Cheaper; EVs To Become More Expensive?
Prime Minister Narendra Modi has announced a major GST reform that will simplify India's current four-slab tax structure into a two-slab system. The GST Council, headed by Finance Minister Nirmala Sitharaman, is meeting on September 3-4 to finalise the new structure, which will affect around 175 products, including automobiles.
For the car market, this reform could bring some of the biggest changes in recent years. Here's how different vehicle categories will be impacted.
Small Cars To Get Cheaper
Sub-4m cars with petrol engines up to 1200cc and diesel engines up to 1500cc will see GST drop from 28 percent to 18 percent. The 1-3 percent cess on these vehicles could also be removed. This effectively means an 11-13 percentage point tax reduction, making small hatchbacks and compact sedans significantly more affordable.
Hybrids To Benefit From Tax Cuts
Small hybrids in the sub-4m segment, which already don't attract cess, are expected to see a 10-point reduction in GST. Larger hybrids will also see relief, though at a smaller margin. This could help hybrids become a stronger alternative to conventional petrol and diesel cars.
Car GST Rates: Before vs After Reform
| Vehicle Category | Current GST + Cess | Effective Tax Now | Proposed GST | Expected Effective Tax | Impact on Prices |
|---|---|---|---|---|---|
| Sub-4m Petrol (≤1200cc) | 28% + 1% cess | 29% | 18% | 18% | ▼ Cheaper (–11 pp) |
| Sub-4m Diesel (≤1500cc) | 28% + 3% cess | 31% | 18% | 18% | ▼ Cheaper (–13 pp) |
| Sub-4m Hybrids | 28% + 0% cess | 28% | 18% | 18% | ▼ Cheaper (–10 pp) |
| Larger Cars (≤1500cc → typical sedans) | 28% + 17% cess | 45% | 40% + reduced cess | ~50% | → Almost unchanged |
| Larger Cars (>1500cc engines) | 28% + 20% cess | 48% | 40% + reduced cess | ~50% | → Almost unchanged |
| SUVs (>4m, >1500cc, >170mm GC) | 28% + 22% cess | 50% | 40% + reduced cess | ~50% | → Almost unchanged |
| EVs (₹20–40 lakh) | 5% + 0% cess | 5% | 18% | 18% | ▲ Costlier (+13 pp) |
| EVs (>₹40 lakh) | 5% + 0% cess | 5% | >18% (likely 28–40%) | TBD | ▲ Much costlier |
| Entry-level EVs ( | 5% | 5% | Not clarified | ? | ? Unclear |
Larger Cars & SUVs To See Limited Impact
Vehicles longer than 4m and with larger engines are expected to come under a 40 percent GST slab. However, the current 15-22 percent cess will be adjusted to keep the overall tax rate close to the existing 50 percent. Popular midsize SUVs and MPVs like the Hyundai Creta, Kia Seltos and Toyota Innova may not see major price changes.
Premium EVs Will Become More Expensive
The biggest surprise is the increase in GST on electric vehicles. EVs priced between Rs 20 lakh and Rs 40 lakh could see GST rise from 5 percent to 18 percent. Those priced above Rs 40 lakh may face even higher rates. This will make models like the Tata Harrier EV, Mahindra XUV 9e and luxury EVs from Tesla, BMW and Mercedes more expensive.
Uncertainty Around Entry-Level EVs
There is no clarity yet on GST for budget EVs like the Tata Tiago EV and MG Comet EV. If they remain in the 5 percent slab, demand could increase further. If brought under the higher 18 percent bracket, however, their appeal could weaken in the price-sensitive mass market.
DriveSpark Thinks
The new GST reform will benefit small cars the most, making them far more attractive to first-time buyers and families. Hybrids will gain a cost advantage too, while midsize cars and SUVs will remain largely unaffected. On the other hand, premium and luxury EVs are set to get more expensive, which may slow down their adoption. Overall, this reform could reshape buying trends in India by reviving the small car segment while tightening taxes on high-end vehicles.
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