Simplified tax structure to take effect September 22, with rates dropping for most vehicle categories
04 Sep 2025 | 3345 Views | By Angitha Suresh
In what could be a significant boost for India's automobile industry, the recent GST Council reforms will bring substantial tax relief across most vehicle segments, with two-wheeler manufacturers emerging as the biggest winners, according to a detailed analysis by Equirus Securities.
The brokerage firm's assessment of the 56th GST ...
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In what could be a significant boost for India's automobile industry, the recent GST Council reforms will bring substantial tax relief across most vehicle segments, with two-wheeler manufacturers emerging as the biggest winners, according to a detailed analysis by Equirus Securities.
The brokerage firm's assessment of the 56th GST Council meeting outcomes reveals that the automobile sector stands to benefit considerably from the simplified tax structure, which reduces the current four-slab system to just two primary rates of 5% and 18%, plus a special 40% rate for luxury items.
Two-Wheeler Segment to See Maximum Impact
The most dramatic change affects the two-wheeler market, where over 92% of domestic production falls below 350cc engine capacity. These mass-market motorcycles and scooters will see their GST burden drop from 28% to 18% when the new rates take effect on September 22, 2025.
"We expect two-wheeler OEMs and related ancillaries to be the key beneficiaries of these reforms, with the strong replacement base likely triggering pent-up demand," Equirus Securities noted in its report.
However, premium motorcycle manufacturers face a different reality. Bikes above 350cc, though representing less than 1% of the market, will see their total tax burden increase from 31% (including cess) to 40%. This change particularly affects Royal Enfield, which derives approximately 10% of its domestic volumes from this segment.
Passenger Vehicles: Mixed Fortunes
The passenger vehicle segment presents a nuanced picture. Small cars, micro-SUVs, and compact SUVs—collectively accounting for nearly 60% of the domestic PV market—will benefit from a significant tax reduction to 18% from the earlier 29-31% range. Equirus identifies Maruti Suzuki and Tata Motors as primary beneficiaries of this change.
Luxury vehicles and larger SUVs will also see relief, though more modest, with GST rates dropping to 40% from the previous 45-50% range. The brokerage expects only gradual recovery in the PV segment, noting that "consumer sentiment on the ground remains mixed—small cars may witness some revival, while the premium segment is likely to remain largely unaffected."
Commercial Vehicles and Farm Equipment
The commercial vehicle segment will see GST rates halved from 28% to 18%. However, Equirus tempers expectations for immediate volume growth, pointing out that most fleet operators already avail Input Tax Credit (ITC).
"The reduction will mainly aid in releasing some working capital, while overall demand will continue to be driven by logistics activity and improvement in freight rates," the report states.
Farm equipment manufacturers have reason to celebrate, with tractors and related machinery seeing rates drop from 12% to just 5%, which analysts expect will "lead to gradual push in demand."
Replacement Market Dynamics
An interesting aspect of Equirus's analysis focuses on the replacement segment—tyres and batteries. While these products will benefit from reduced GST rates (28% to 18% for most tyres and batteries, 18% to 5% for tractor tyres), the brokerage suggests manufacturers might use this opportunity differently than expected.
"Tyre manufacturers could benefit by lowering the level of discounts, as the overall cost to customers would already decline with reduced GST," the report notes. This strategy could help companies optimize pricing and improve margins rather than necessarily driving volume growth, given the relatively inelastic demand for replacement products.
Strategic Implications
The GST restructuring represents more than just tax relief—it signals a shift in government policy toward simplification and sector-specific support. The substantial reductions for mass-market vehicles, combined with maintained low rates for electric vehicles at 5%, align with broader goals of increasing mobility access while promoting cleaner transportation.
However, the increased rates for premium motorcycles and the creation of a 40% luxury tier for high-end vehicles also reflects an intent to maintain progressivity in the tax structure.
Market Outlook
While the reforms are comprehensive, Equirus Securities maintains a measured outlook on their immediate impact. The brokerage emphasizes that beyond tax rates, fundamental demand drivers—consumer sentiment, freight rates, and economic conditions—will continue to play crucial roles in determining sector performance.
The staggered benefits across segments suggest investors and industry watchers should look beyond headline numbers to understand which companies are best positioned to capitalize on these changes.
With implementation set for September 22, 2025, market participants have a clear timeline to prepare for what could be one of the most significant tax reforms affecting the automobile sector in recent years.