GST Reforms Likely to Cut Rates for Two-Wheelers, Small Cars, Say Sources

New Delhi: In a major step toward simplifying India’s indirect tax regime, the central government is considering a reduction in GST rates for entry-level two-wheelers, small cars, and hybrid passenger vehicles, according to government sources.

The proposed move, part of a broader plan to introduce a two-rate GST structure, is seen as a relief measure aimed at benefiting the middle class and revitalising the automotive sector. If approved, the reforms could be among the most significant changes since GST was rolled out in 2017.

Reforming a Complicated Structure

Currently, the auto sector faces a multi-layered tax system, where GST and cess rates vary depending on engine size, body length, and ground clearance. The proposed reforms aim to eliminate these inconsistencies, aligning tax rates with product segments and consumption patterns.

Sources told that the proposal is being developed following Prime Minister Narendra Modi’s Independence Day speech, where he hinted at the next generation of GST reforms. The changes could be implemented by Diwali.

Key Tax Reductions Being Considered

Here’s a breakdown of the categories under review:

• Two-Wheelers (<350cc): GST could drop from 28% to 18%

• Small Cars (up to 1200cc petrol / 1500cc diesel, under 4m): Current effective rate of 29–31% (GST + cess) may reduce to 18% flat

• Hybrid Vehicles (up to 4m): GST could fall from 28% to 18%

Meanwhile, larger vehicles, luxury cars, and SUVs will continue to attract higher tax rates of up to 50%, combining GST and cess.

For detailed comparisons, refer to the table below:

Why It Matters

Officials argue that taxing small and affordable vehicles at rates similar to luxury SUVs creates a disparity that needs to be addressed. Reducing GST on mass-market vehicles could also boost domestic demand, support job creation in the automotive industry, and enhance affordability for middle-income households.

“This move is not just about lowering taxes; it’s about correcting structural anomalies,” a senior official was quoted saying.

What’s Next

The Group of Ministers (GoM) on rate rationalisation, led by Bihar Deputy Chief Minister Samrat Choudhary, is expected to review the proposal soon. The larger plan also includes moving toward a simplified GST structure with 5% for essentials, 18% for standard goods, and 40% only for luxury and sin goods.

Industry experts believe these reforms could pave the way for a more equitable and efficient tax system, easing compliance burdens and fuelling growth in one of India’s largest sectors.