The Government of India has just announced a key reform of the Goods and Services Tax (GST) system aimed at simplifying taxation and boosting local vehicle sales. The new GST structure will have just three rates now, namely 5%, 18%, and 40% – removing the earlier complexity of many levels. The automotive sector largely welcomes this reform as it is anticipated that it will lower costs, improve affordability and spur growth in various sectors.
Piyush Arora, CEO & MD, Škoda Auto Volkswagen India Pvt Ltd, on the government’s move towards GST rationalisation and simplification, said, “Rationalisation and simplification of GST is a welcome step and one that the automotive industry has been seeking for a long time. The shift to an 18% slab for small cars will enhance affordability and support stronger demand in the high-volume segment. At the same time, the 40% slab for premium and luxury vehicles provides clarity and simplifies taxation, helping customers make informed choices with greater confidence.”
“With a diverse portfolio spanning Škoda and Volkswagen to Audi, Porsche, Lamborghini and Bentley, we recognise the significance of reforms that balance accessibility with aspiration.”
“Such reforms have the potential to strengthen market sentiment, encourage demand across segments, and create a more conducive environment for long-term growth. This approach signals the government’s intent to make the tax ecosystem more equitable and future-ready, which will benefit the entire value chain and further boost India’s position as a key automotive hub.”
Key GST Changes Across Vehicle Categories
The latest update on GST rates alters how passenger cars, two-wheelers, commercial vehicles, and electric vehicles are affected:
EVs: EVs have been placed in the lowest 5% GST category, and the 5% GST will allow continued government support for green vehicles. With the same GST rate, the continued low price should help keep it simple for consumers and promote a greater move toward cleaner vehicles.
Small Passenger Vehicles: Small petrol /CNG cars, with engine size of no more than 1,200cc; and diesel cars, with engine size of no more than 1,500cc; are now at an 18% GST rate, down from original total tax of 28-31% . This amounts to a price drop of about 8.5% for entry-level hatchbacks such as the Wagon R; small hatchbacks with larger engine sizes such as the Swift.
Mid-Segment Cars and SUVs: Vehicles with engine size going up to 1,500cc now incur 40% GST, down from a high of 50% GST. A 40% GST reduces the price of vehicles such as compact sedans and sub compact SUVs by about 3.5%, which lowers the price of vehicles such as the Swift Dzire; Brezza; Creta.
Luxury SUVs and Large MPVs: For large vehicles such as luxury SUVs and large multi-purpose vans with a capacity of over 1500cc, the GST has been reduced from 50% to 40%. GST on these vehicles brings their retail price down by a margin of around 6.7%, making two models like the XUV700 and Innova marginally more affordable.
Two-wheelers: For motorcycles with a capacity of below 350cc, GST has shifted from 28% to 18%, lowering expected retail pricing by 7.8%. However, for motorcycles with a capacity of over 350cc, they’ll now draw a GST of 40%. Therefore, it is likely that retail pricing will increase by around 6.9% even though the overall effect may be negligible.
Tractors and Agriculture: Tractors with Ice engines, as well as fuel cell units, whether powered by hydrogen or otherwise, will see GST shift from 12% to 40% GST down to GST of 5% to 12%. The expected deduction brings expenses down by as much as 6.3% in order to encourage farmers uptake.
Commercial Vehicles and Buses: All light, medium, and heavy commercial vehicles, including buses, will now include GST of 18% down from 28%. In the same vein, three-wheelers will shift from GST of 28% to GST of 18%. Hopefully, this shift not only lowers operational costs, it will also stimulate fleet growth.
Price Implications Across Segments
The revised GST rates directly influence vehicle pricing. Entry-level cars and compact SUVs see the largest reductions (~8.5%), mid-segment vehicles experience moderate relief (~3.5%), and premium models enjoy a 6–7% drop. ICE two-wheelers benefit from nearly 7.8% lower prices, while premium bikes see modest increases. Tractors, commercial vehicles, and buses experience price drops of 6–7.8%, which should encourage sales and investment in both passenger and commercial mobility sectors.
The automotive aftermarket also benefits from the GST revision. Almost all automotive components are now taxed at 18% GST, replacing higher rates of 28% on several items. As a result, spare parts and maintenance costs are expected to decline by roughly 7.8%, making vehicle ownership more affordable and supporting service businesses.
Boost to Domestic Vehicle Sales
Crisil Intelligence projects positive domestic sales outcomes due to these GST revisions. For fiscal year 2026:
- Passenger Vehicles: Expected to have modest single digit growth, supported by lower prices for the compact and midsize segment.
- Two-Wheelers: Anticipated large single-digit growth due to lower retail prices for entry level bikes.
- Tractors: Continuation of momentum with 4-7% growth, assisted by lower GST on agricultural Machines
- Commercial Vehicles: Mildly stable to moderately positive growth supported by lower costs of ownership.
Impact on Transport and Logistics
The GST changes also benefits all areas of road freight and multimodal transport:
- Multimodal Logistics: The GST on integrated logistics services was reduced from 12% to 5%. This means exporters and commercial transport operators are realising reductions in their costs.
- Commercial Vehicle Insurance: The GST on third party insurance for goods carriers was reduced from 12% to 5%, therefore premiums are lower.
- Fleet Operators: Smaller operators will continue to pay 5% GST, without the benefit of input tax credit (ITC). Larger fleets will pay 18% GST as opposed to 12% GST and receive ITC creating efficiency.
Combined it reduces costs for the industry as a whole reducing operational costs for the transport industry and will help lower shipping costs and increase profitability for fleet operators.
Conclusion
The revised GST system is a notable measure for tax simplification, reducing prices of vehicles and increasing domestic consumption. The government is looking to encourage growth in the automotive sector through lower rates for entry-level and mid-level vehicles, a continued lower tax on EVs, and tax simplification for commercial vehicles and parts.
For buyers, this means lower costs and more affordability. It allows a good environment for businesses to expand their fleets, purchase electric vehicles, and improve after-market services. With GST reform intended to lower costs, increase sales, and drive the growth of sustainable and affordable transport, India’s automotive sector is positioned for a favourable growth cycle in the near future.
The recent GST changes have much more value than a tax change, they also serve as a value add for India’s automotive and transportation sector that will create an impact on affordability and demand and sustainable growth for the industry.