In a move that could significantly impact car prices and boost consumer demand, the government is planning sweeping reforms to the GST regime for automobiles. According to government sources, the restructuring is aimed at resolving long-standing disputes related to engine capacity and vehicle size, while also making vehicles more affordable for the common man.
At present, automobiles attract GST at 28% - the highest tax slab. with an additional compensation cess ranging from 1 to 22% depending on the type of vehicle. This brings the total tax incidence on cars anywhere between 29% for small petrol cars to as high as 50% for SUVs. Electric vehicles, however, enjoy a concessional rate of 5%.
Under the proposed reforms, the Centre is looking to overhaul the existing four-slab GST structure of 5, 12, 18, and 28%, and replace it with a simplified system of just two slabs - 5 and 18 %. A higher 40% rate will remain applicable only to a handful of luxury and sin goods. Automobiles are expected to be placed within the new structure in a way that eliminates disputes linked to vehicle classification by length and engine capacity.
Experts believe a reduction in the effective GST rate on automobiles will make cars more affordable, giving a strong push to demand and sales in the sector. This aligns with the government's broader aim of boosting consumption as part of the tax overhaul.
The proposal will be taken up by the Group of Ministers (GoM) on GST rate rationalisation in its upcoming meeting on August 21, 2025. Following this, the GST Council - comprising the Centre and state finance ministers is likely to convene next month to finalise and approve the new tax structure.
Currently, essential items are taxed at nil or 5%, while luxury and sin goods fall under the 28% slab. The Centre's suggestion to prune the structure to just two slabs is seen as one of the most significant tax reforms since the introduction of GST in 2017.
If approved, the move is expected not only to simplify compliance but also to give the automobile sector - a key contributor to India's GDP - a much-needed boost.
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