The Government of India has announced a major restructuring of the Goods and Services Tax (GST), effective 22nd September 2025.
This landmark decision simplifies the previous multi-slab structure into three clear categories:
5% GST – for essential goods and services
18% GST – the standard rate for most items, including automobiles and parts
40% GST – for super luxury goods such as high-end vehicles, premium imports, and luxury motorcycles
This change is expected to impact the automobile and electric vehicle (EV) sectors significantly.
Small cars with petrol engines up to 1,200 cc (≤ 4 metres in length), diesel cars up to 1,500 cc (≤ 4 metres), motorcycles up to 350 cc, three-wheelers, ambulances, and light commercial vehicles will now attract 18% GST.
Previously, these segments were taxed at 28% plus cess.
This reduction will make entry-level vehicles more affordable, particularly important ahead of the festive season.
All auto parts and accessories are now uniformly taxed at 18%, replacing earlier variations.
This is expected to simplify compliance and reduce costs for manufacturers and suppliers.
Larger vehicles, cars longer than 4 metres, SUVs, motorcycles above 350 cc, and other premium models are now placed under the 40% GST slab.
While this is slightly lower than the earlier combined rate of GST plus cess, it maintains a high taxation environment for luxury consumption.
On-road prices of many premium vehicles may rise, putting pressure on demand in this segment.
Electric vehicles will continue to enjoy the 5% concessional GST rate across all categories.
This is a major win for the EV industry, ensuring affordability and supporting India’s clean mobility mission.
While EVs remain at 5% GST, the reduction in tax on small petrol and diesel cars to 18% could make conventional vehicles more attractive in the short term.
The industry will closely watch consumer behaviour during the upcoming festive season to see if this shift affects EV adoption.
| Vehicle Type / Segment | Previous Tax (GST + Cess) | New Tax (from Sept 22, 2025) | Impact |
|---|---|---|---|
| Small ICE cars (≤1,200 cc, ≤ 4 m) | 28% + 1–3% cess ≈ 29–31% | 18% GST | Lower tax → more affordable |
| Small motorcycles (≤350 cc), three-wheelers, ambulances, and auto parts | 28% + cess | 18% GST | Simplified and reduced tax |
| Large cars/SUVs/mid-size cars | 28% + 17–22% cess ≈ 45–50% | 40% GST (no cess) | Slight net relief or steady—premium pricing |
| Electric Vehicles (all segments) | 5% GST | 5% GST (no cess) | Retained low tax → adoption bolstered |
Affordable mobility: Small ICE vehicles and two-wheelers become cheaper.
Simplified compliance: Auto parts and services aligned to 18% GST.
Luxury hit: Super luxury cars and bikes face higher taxes of up to 40%.
EV push intact: All electric vehicles remain at 5% GST, reinforcing the government’s green mobility agenda.
GST 2.0: Small Cars Win, Luxury Faces the Heat, EVs Stay Protected
The GST Council’s September 2025 verdict is nothing short of a reset for India’s tax landscape. By collapsing multiple slabs into three — 5%, 18%, and 40% — the Council has delivered both clarity and a powerful policy signal.
For the auto sector, the changes are immediate and segmented: small cars and mass mobility benefit, luxury vehicles face sharper taxation, and EVs continue to enjoy the strongest incentive. The outcome reflects a balance between consumer affordability, fiscal discipline, and green mobility goals.
GST reduced from 28% → 18% on:
Small petrol cars (≤1200cc, ≤4m)
Small diesel cars (≤1500cc, ≤4m)
Motorcycles ≤350cc
Three-wheelers and ambulances
Auto components and accessories
At the same time:
Large cars, SUVs, premium motorcycles → shifted to 40% GST (no cess).
EVs continue with 5% GST across all categories.
Savings of ₹10,000–50,000 per vehicle are expected in the mass ICE segment.
Price parity improves between small ICE cars and compact EVs, potentially shifting consumer preference.
Luxury and premium buyers face 10–12% higher on-road prices, impacting demand elasticity.
Affordability First – Mass consumers benefit from lower rates.
Luxury Discouraged – Super-premium vehicles remain heavily taxed.
EVs Protected – Clean mobility retains 5% GST support.
Compliance Simplified – Auto parts at a uniform 18% ease supply chain.
Maruti Suzuki, Hyundai, and Tata Motors gain from small car and compact EV affordability.
Toyota, Honda, and premium OEMs face challenges with higher-taxed hybrids and large cars.
Luxury OEMs (BMW, Mercedes, Audi, Tesla) must reassess pricing and portfolio strategy.
Suppliers benefit from a single 18% GST rate on components.
The new GST structure is a game-changer for India’s auto and EV industry.
By cutting rates for small vehicles and retaining incentives for EVs, the government aims to strike a balance between affordability, industry growth, and sustainability.
However, luxury automakers will face challenges, while mass-market players and EV manufacturers are set to benefit from improved demand and simplified taxation.
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