In a sweeping tax reform move, the Indian government is proposing significant cuts to the Goods and Services Tax (GST) on small cars and insurance premiums, a development that has sparked a rally in financial markets and drawn widespread attention from industry leaders and analysts alike, according to a report by Reuters.
As part of Prime Minister Narendra Modi’s most ambitious tax overhaul since the GST was introduced in 2017, the federal government has recommended slashing the GST rate on small petrol and diesel vehicles to 18% from the current 28%, Reuters reported, citing a senior government source directly involved in the matter.
The proposed changes, which are expected to take effect in October pending approval from the GST Council, also include reducing the GST on health and life insurance premiums to a maximum of 5%—or potentially zero—from the present 18%. These measures are projected to lower consumer prices and stimulate demand across key sectors.
The announcement triggered an immediate positive response in India’s stock markets. Shares of Maruti Suzuki (MRTI.NS), the country’s largest seller of compact cars, surged nearly 9% on Monday, leading a broader rally in auto and insurance stocks. Other automakers such as Mahindra & Mahindra (MAHM.NS), Hero MotoCorp (HROM.NS), and Bajaj Auto (BAJA.NS) saw gains between 2% and 4%. Insurance firms including ICICI Prudential (ICIR.NS), SBI Life (SBIL.NS), and LIC (LIFI.NS) rose 2% to 5% before moderating slightly.
As reported by Reuters, the reform aims to simplify India’s complex tax structure by consolidating most goods and services under just two GST rates: 5% and 18%. The highest slab of 28% would be eliminated, though a new 40% tax could be imposed on select "sin-goods" such as tobacco products and luxury items.
The move is seen as a major win for small car manufacturers like Maruti Suzuki, Hyundai Motor India (HYUN.NS), and Tata Motors (TAMO.NS), whose sales have been under pressure as consumer preferences shift toward larger SUVs. Small cars—defined as vehicles with engine capacities below 1200cc (petrol) or 1500cc (diesel) and under 4 meters in length—accounted for only about one-third of the 4.3 million passenger vehicles sold in India last fiscal year, down from nearly 50% before the pandemic.
R.C. Bhargava, Chairman of Maruti Suzuki, hailed the proposed changes as a “huge reform,” as quoted in the Reuters article, emphasizing that improved affordability could bring more Indians into the formal purchasing economy. “This restructuring of the GST will increase competitiveness of Indian products… Competition, combined with your ability to produce and sell at lower prices, makes for the best efficiency,” he said.
Despite concerns about potential strain on government revenues, the reforms have been welcomed by businesses and political observers, particularly amid ongoing trade tensions with the United States. The final decision rests with the GST Council, chaired by India’s federal finance minister and comprising representatives from all states. A meeting is expected to be convened by October to review and approve the proposals.
India’s finance ministry has not yet commented on the matter, Reuters noted.