The government's announcement of next-generation GST reforms marks a significant step toward simplifying India's indirect tax regime. A key proposal under consideration is the reduction of GST on small cars (under 1200cc) and two-wheelers from 28% to 18%, with classification based on engine capacity rather than vehicle type. The GST Council is expected to review this proposal ahead of Diwali.
This reform comes at a crucial time for the auto industry. In FY25, two-wheeler domestic sales grew by 9% year-on-year to 19.61 million units, compared to 13% growth in FY24. Passenger vehicle sales rose by just 2% to 4.30 million units, down from 8% growth the previous year. Entry-level segments have been particularly affected by rising costs and weak consumer sentiment. In June 2025, car sales by Indian automakers to dealerships fell to an 18-month low of 0.31 million units - a 7.4% year-on-year decline, driven by sluggish demand in urban markets.
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The proposed GST cut is expected to revive demand in these segments, especially with the upcoming festive season, which traditionally boosts volumes. Additionally, the recent reduction in the repo rate by RBI to 6% is likely to improve vehicle loan affordability and support retail sales.
Historically, GST rate cuts on auto components- from 28% to 18% in 2018 led to greater formalisation and encouraged investment in quality and safety standards across the auto-component aftermarket. A similar improvement in product standards and service quality is anticipated if the current reforms are implemented.
The broader reform blueprint focuses on three pillars: structural simplification, rate rationalisation, and ease of doing business. If executed effectively, the GST overhaul could provide a timely boost to the auto sector and support broader economic recovery.
Author: Saket Mehra, Partner and Auto & EV Industry Leader, Grant Thornton Bharat
Disclaimer: These are the personal opinions of the author
