The Indian government is preparing a significant Goods and Services Tax (GST) reduction on small cars. Currently, small cars attract 28 percent GST along with an additional 1 percent cess. According to the new proposal, cars shorter than 4 meters with engines up to 1200 cc using petrol, CNG, or LPG may be taxed at only 18 percent. This major cut could bring car prices down substantially for Indian buyers.

Large cars and SUVs to see limited relief

While small cars are expected to benefit the most, large cars and SUVs will also get some relief. The government is considering a 40 percent “special rate” on such vehicles. At present, combined GST and cess on these cars range between 43 percent and 50 percent. Electric vehicles will likely continue under the current 5 percent GST, ensuring EV affordability remains intact.

Modi signals Diwali gift for consumers

Prime Minister Narendra Modi hinted at major tax changes during his Independence Day speech. He declared that next-generation GST reforms are on the way. According to him, these reforms will lower the overall tax burden across the country. Modi described it as a Diwali gift for the people of India.

New GST structure under consideration

Reports suggest that the central government is working on simplifying GST slabs. The proposed structure may reduce the current four slabs into two major categories: 5 percent and 18 percent. The 12 percent and 28 percent slabs could be removed. However, six or seven special items, including luxury cars, may continue under the 40 percent slab. Everyday goods are expected to remain in the 5 percent bracket. Mid-range products and industrial goods could fall into the 18 percent slab. Appliances like dishwashers and large televisions may shift from 28 percent to 18 percent, boosting demand.

Price drop in small cars expected

Experts believe the reduction in GST could lower small car prices significantly. According to V.G. Ramakrishnan of Avantiom Advisors, an 11 percent cut may reduce ex-showroom prices by nearly 12 to 12.5 percent. He explained that although the absolute reduction may range between ₹20,000 and ₹25,000, the impact on consumer sentiment will be highly positive.

Revival possible in the car market

A cut in GST is expected to revive demand in the entry-level car market. Industry insiders believe the move could stimulate sales across hatchbacks and compact SUVs under 4 meters. Popular models like Hyundai Exter and Tata Punch may see price benefits. A leading Delhi-NCR car dealer stated that today’s car buyers are more ambitious. Many prefer compact SUVs instead of small hatchbacks, even as their first vehicle. He highlighted that combined taxes including GST, registration, and insurance push small car costs up by nearly 41 to 42 percent.

Shrinking market share of small cars

Industry data highlights a worrying trend for small cars in India. In FY25, sales of small cars and hatchbacks fell 13 percent to around 1 million units. In contrast, SUV sales touched 2.35 million units, more than double the volume of small cars. SUV sales also registered a growth of 10.2 percent during the same period. Over the past five years, the share of small cars in the overall passenger vehicle market has been declining steadily. In FY25, their share dropped to just 23.4 percent. The trend continued in the first four months of the current fiscal year, where the share fell further to 21 percent. Overall passenger vehicle sales also slowed during this period.

Rising safety standards push costs higher

Industry leaders point out that strict safety and emission norms introduced in recent years have raised costs sharply. Over the past five to six years, the price of small cars has increased by 30 to 40 percent. Partho Banerjee, senior executive at Maruti Suzuki, said higher costs have driven entry-level buyers away. He explained that affordability has become a major barrier, leaving many first-time buyers unable to purchase cars. This trend has led to sustained weakness in the small car segment.

Broader GST reform and economic impact

The proposed changes are not limited to the automobile industry. By simplifying slabs, the government aims to reduce confusion for businesses and boost compliance. Experts believe lower GST on mid-range goods could support consumption, especially among middle-class families. Reduced taxes on white goods like televisions and dishwashers could push sales ahead of the festive season. Economists say the timing of these reforms is critical, as India faces a slowdown in domestic demand. Lower taxation is expected to ease pressure on households and encourage spending.

Potential challenges for implementation

Although the proposal seems consumer-friendly, challenges remain. States rely heavily on GST revenues, especially from high-tax items like cars. Reducing the tax burden may cause revenue shortfalls. Experts suggest the government may need to increase compensation to states. Additionally, the 40 percent special rate on large cars could still be contested by automakers seeking lower duties.

Auto sector hopes for a boost

Automakers welcome the move, expecting renewed demand in the entry segment. Companies like Maruti Suzuki, Hyundai, and Tata Motors could benefit the most, as they dominate the small car category. Compact SUVs like Hyundai Exter, Tata Punch, and Maruti Fronx are likely to become more attractive to budget-conscious buyers. Analysts believe the changes could also encourage fresh investments in the auto industry.

Festival season demand outlook

The GST cut announcement comes at a strategic time, just ahead of Diwali. The festive season is traditionally the strongest period for automobile sales in India. Car manufacturers and dealers expect the proposed reform to boost bookings. If implemented quickly, consumers may get lower prices in time for Diwali shopping. This could help the industry recover from months of sluggish sales.

Shift in consumer preferences

Market behavior has also been shifting. Many customers now prefer compact SUVs over hatchbacks, citing better features and road presence. With the new tax cut, compact SUVs under 4 meters may see significant benefits, reducing the price gap with hatchbacks. Experts suggest this could change buying patterns further, with more two-wheeler owners skipping hatchbacks and opting directly for compact SUVs.

Long-term outlook for small cars

Despite shrinking sales, small cars still play a vital role in India’s auto market. They remain the most affordable entry point for millions of buyers. If the GST cut is implemented, the segment could see a revival. Industry experts believe affordability is the key driver, and lower taxes may restore balance between hatchbacks and SUVs. However, long-term growth will also depend on income levels, financing availability, and fuel prices.

The Modi government’s proposal to reduce GST on small cars marks a bold step. The potential cut from 28 percent to 18 percent could lower prices by over 12 percent. This move aims to revive the shrinking small car market and stimulate demand ahead of Diwali. Large cars and SUVs will continue under a higher slab, but electric vehicles are expected to retain the 5 percent rate. While challenges remain, including revenue concerns for states, the reform could bring significant relief to consumers and fresh momentum to the auto industry.