The recent GST Council move to overhaul the taxation in the automotive industry has generated hope and confusion throughout the industry, with new tax rates going into effect on September 22, 2025. This long-awaited action is portrayed as a game-changer for prices, but also presents a number of interpretative difficulties for consumers and producers.
Overview of the New GST Structure
In a path-breaking reform, the GST Council implemented a two-tier taxation system for vehicles, doing away with the erstwhile combination of slabs and cesses. Small cars, low-end motorcycles (upto 350 cc), three-wheelers, ambulances, and commercial vehicles will be taxed at 18%, from the earlier 28%, a move likely to improve affordability and demand. But bigger cars, mid-size SUVs, luxury vehicles, and above 350 cc motorcycles will now command a heavy 40% GST rate, although this does eliminate high compensation cesses that were earlier charged, reducing slightly the overall tax burden for some models. Electric vehicles continue to get the lowest rate of 5%, sustaining the government’s efforts in favor of cleaner mobility.
GST 2.0: Winners and Losers
The lowering to 18% GST is expected to make best-selling small cars including Maruti Swift, Hyundai i20, Tata Altroz, and some entry-level motorcycles, much more affordable, with estimates by the industry forecasting a 5–8% cut in show-room prices. The step is generally seen by manufacturers as a shot in the arm for entry-level sales in an economy-conscious market.
On the contrary, customers of high-end SUVs, bigger cars, and high-volume two-wheelers may witness a sharp hike in prices, as these products shift into a new flat 40% GST slab. This has generated confusion among dealers and customers regarding eligibility, particularly with reference to hybrid models and cars that exceed size and engine limits. For instance, small hybrids that qualify as ‘small cars’ are rewarded, while bigger ones are penalized, giving rise to controversy over definitions and adherence.
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The Real Roots of Confusion
The transition from multiple slabs and extra compensation cesses to two GST rates is broadly perceived to be good simplification. Yet, the engine capacity and vehicle length criteria have also been flashpoints for controversy. Quite a number of consumers and business leaders are unclear about which models will qualify, resulting in confusion regarding price quotes and invoicing before the festive demand peak. Industry groups have urged the government for clear guidelines and quick notification on classifications and transition mechanisms, particularly for unsold inventory and hybrid models.
Nutshell
The GST Council’s auto reforms bring more price clarity and generate demand for low-cost cars but have also planted confusion on compliance and eligibility for higher-end cars and hybrids. Definition and transition clarity will be the key for a seamless roll-out as the new rates kick in on September 22, determining the festive season fortunes of the sector.
