Key highlights
- Proposal aims to reduce GST on small cars under 4 meters and 1,200cc to 18%
- Move could revive demand in the entry-level segment and boost affordability
- GST Council likely to review and decide by October, ahead of festive season
The Indian government is reportedly considering a major tax reform that could reshape the small car market. According to multiple sources, the proposal suggests lowering the Goods and Services Tax (GST) on small petrol and diesel cars from the current 28% to 18%. If approved, this would be the biggest GST overhaul since 2017 and could be implemented by Diwali.
Small cars are defined as vehicles under 4 meters in length with engine capacities up to 1,200cc for petrol and 1,500cc for diesel, This category currently attracts a combined tax of 28% GST plus 1–3% cess, depending on fuel type. The new proposal aims to simplify the tax structure and make entry-level cars more affordable for middle-class buyers.
Why This Matters
Sales of small cars have been sluggish in recent years, with buyers shifting toward larger, feature-rich SUVs. Once the backbone of India’s passenger vehicle market, small cars now account for just a third of the 4.3 million units sold last fiscal, down from nearly 50% pre-pandemic.
Maruti Suzuki, which dominates the sub-1200cc segment with models like the Alto, Wagon-R, and Dzire, stands to benefit the most. The proposed tax cut could help restore competitiveness and revive demand in a segment that’s been losing ground.
What’s Changing
The GST reform is part of a broader plan to move toward a two-slab structure—5% and 18%—eliminating the 28% slab entirely. Luxury cars and SUVs with larger engines may be taxed at a new special rate of 40%, while electric vehicles will continue to enjoy the 5% slab.
The GST Council, chaired by Finance Minister Nirmala Sitharaman, is expected to review the proposal in its next meeting, likely in October.
Our Thoughts
Small cars are the lifeblood of India’s mobility story, and taxing them like luxury goods never made sense. If this reform goes through, we could see a real shift in buyer sentiment.
Also read: BMW cars to get expensive in India from September 1
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