Big GST cut may rev up demand for small cars, hatchbacks likely to attract 18% tax against 28% now

NEW DELHI: The proposed goods and services tax (GST) recast could perk up the small passenger car market, which has been under pressure for some time amid a growing preference for larger vehicles such as SUVs.

Small cars are likely to be placed in the 18% tax slab, substantially reducing the tax burden on them, people familiar with the matter said. Small cars of 4 metres and less in length and engine capacity up to 1,200 cc (petrol, CNG and LPG) now attract 28% GST and 1% cess. Large cars and SUVs are likely to face the special rate of 40%, they said. Currently, these vehicles attract 43-50% tax, which includes GST and cess.

There will likely be no change in the GST rate for electric vehicles, currently at 5%, the people said.

Prime Minister Narendra Modi announced an overhaul of the eight-year-old indirect tax in his Independence Day speech on Friday. “We are bringing next-generation GST reforms. This will reduce the tax burden across the country. This will be a gift ahead of Diwali,” he had said in his address.

Two-slab Structure
Officials said the Centre has proposed a two-slab structure, retaining the 5% and 18% rates and scrapping the 12% and 28% levies. A 40% special rate has been proposed for six-seven items, they said.

According to the proposal sent to the group of ministers (GoM) on rate rationalisation set up by the GST Council ahead of Modi’s speech, daily-use items are likely to be placed in the 5% bracket, while aspirational consumption items for the middle class and industrial goods are likely to face 18% tax.

The GoM will take up the proposal this week, the officials said. A final decision on the proposal will be taken by the GST Council, likely in the third week of September, ET reported Sunday. White goods such as dishwashers and large televisions are also expected to be placed in the 18% bracket, down from 28%, which could boost consumption demand further.

PRICE REDUCTION
“If there is an 11% reduction in GST, the ex-showroom price of small cars will come down by 12-12.5%,” said VG Ramakrishnan, managing partner at Avanteum Advisors. “Even if the absolute cut is in the range of Rs 20,000-25,000, it will be a huge positive on consumer sentiments.”


The tax reset is likely to spur demand at the more affordable end of the market. But with compact SUVs like Hyundai Exter and Tata Punch in the sub-4-metre fray, this uptick may not remain limited to the hatchback segment.

“Car buyers today are aspirational and have access to financing solutions. And some of them are preferring to jump directly from a two-wheeler to compact SUVs rather than a small hatchback,” said the head of a major automobile dealership based in Delhi-NCR. Total levies on small cars stand at 41-42%, he said. This includes GST, registration tax levied by state authorities and insurance.

Sales of compact cars and hatchbacks fell 13% to about one million units in FY25 from the year before, less than half that of SUVs at about 2.35 million, industry data accessed by ET showed.

SHRINKING SHARE
SUV sales rose 10.2% in FY25. The share of small cars in the overall passenger vehicle market fell for the fifth straight year to a low of 23.4% in FY25. It dropped further to 21% in the first four months of the fiscal year, which has seen an overall slowdown in car sales.

Industry veterans attributed the drop to a 30-40% jump in small car prices over the past five-six years due to tighter safety and emission norms.

“Entry-level consumers are not able to afford cars because of high prices,” said Partho Banerjee, senior executive officer, marketing and sales, at market leader Maruti Suzuki, in an interaction earlier this month.