India’s automotive sector could be on the brink of significant change. As part of sweeping Goods and Services Tax (GST) reforms, the central government is considering a move that may sharply reduce taxes on small cars and entry-level motorcycles—currently among the most heavily taxed products in the country.
At present, most automobiles fall under the highest GST slab of 28%, with an additional compensation cess ranging from 1% to as much as 22%, depending on engine size and vehicle type. This means, for example, that a small hatchback or sedan with an engine up to 1200cc and length under four meters faces a tax burden of around 29-31%. Larger vehicles, such as petrol cars over 1200cc or diesel vehicles above 1500cc, can see effective tax rates soar to nearly 43%.
Two-Tier GST Slabs for Auto Sector
According to government sources, the new plan proposes scrapping the current four-slab GST structure—5%, 12%, 18%, and 28%—in favor of just two key slabs: a Merit rate up to 5% and a Standard rate at 18%. A special top slab of 40% would be reserved for luxury vehicles and select items. For most small cars and entry-level bikes (under Rs 10 lakh and up to 350cc), this could mean moving from the punishing current rates down to a far more manageable 18%.
The reform aims not only to make cars more affordable for everyday Indians but also to resolve longstanding disputes over how vehicles are classified for taxation—issues that have often hinged on engine displacement or vehicle length. By streamlining these categories, carmakers may also see smoother regulatory compliance and reduced confusion in pricing.
What Remains Unchanged?
Electric vehicles are set to continue with their favorable 5% GST rate, cementing their position as a future-forward choice for buyers. On the other hand, luxury cars, premium SUVs, and high-end motorcycles (over 350cc) are expected to land in the new top slab—likely facing a total tax around 40%. While slightly lower than their current maximum burden, these models will still command a hefty premium.
The Group of Ministers on GST rate rationalisation is scheduled to discuss these proposals on August 21. If approved, these reforms could go live later this year, potentially giving a major push to automotive demand across the country—especially in the budget segment.
For millions of prospective buyers eyeing small cars or two-wheelers, this could be just the relief they’ve been waiting for. While luxury buyers may not notice much change, mass-market consumers and manufacturers alike are watching closely as India prepares for what could be its biggest auto tax shake-up yet.
