As the festive season begins, a sweeping tax reset promises cheaper cars and bikes and a long-awaited demand revival for the auto industry.
22 Sep 2025 | 9250 Views | By Prerna Lidhoo
For months, India’s car and bike showrooms have worn a muted look. Sales charts flattened, test drives slowed, and once the heart of Indian mobility, the entry-level market began to stumble under the weight of relentless price hikes.
Adding to that, fuel prices stayed stubbornly above Rs 100 a ...
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For months, India’s car and bike showrooms have worn a muted look. Sales charts flattened, test drives slowed, and once the heart of Indian mobility, the entry-level market began to stumble under the weight of relentless price hikes.
Adding to that, fuel prices stayed stubbornly above Rs 100 a litre, regulatory upgrades like BS6 sent sticker prices soaring by nearly 30-50% in just a few years, and inflation squeezed household budgets. Buyers either postponed purchases or migrated to used vehicles. Now, a sharp GST rate reform promises to release that brake.
After years of juggling multiple slabs and a messy compensation cess, the centre has introduced a simpler structure and cut taxes across crucial vehicle categories just as the festive season gets underway.
From small hatchbacks to commuter motorcycles, sticker prices are set to dip for the first time in years and with them, the industry’s hopes of revving up demand. The impact won’t be uniform: the deepest cuts are aimed at sub-4-metre cars and mass market two-wheelers, mid-SUVs get a lighter nudge, and premium SUVs feel only a mild tremor.
Even hybrids may get a subtle incentive to move downmarket. If it plays out as intended, this could be the moment when India’s muted auto demand sets the stage for a broader reshaping of product portfolios and customer preferences.
For the mass market, the message is simple: Vehicles that move India like the small cars, commuter motorcycles, three-wheelers, tractors and public carriers will finally get cheaper. At the other end of the spectrum, the government has folded the old cess into GST and created a higher, unified 40% slab for luxury vehicles, replacing today’s mix of 28% GST plus 17–22% cess.
The change is most visible in entry-level cars. Petrol, LPG and CNG hatchbacks up to 1,200 cc and 4,000 mm in length, and diesels up to 1,500 cc and 4,000 mm, will now be taxed at 18% instead of 28%.
That immediately cuts showroom prices for the segment that has been hit hardest by inflation and regulatory costs. Motorcycles up to and including 350 cc, the 'bread and butter' of India’s two-wheeler market, also move to 18%, while bigger bikes shift to the new 40% bracket.
Three-wheelers, too, drop from 28% to 18%, as do most hybrid cars below the small-car thresholds. Even specified tractor parts such as rims and brakes have been slashed to 5% GST from 18%, making rural transport cheaper.
Bigger machines see a different kind of rationalisation. All mid-size and large cars exceeding 1,500 cc or 4,000 mm, including SUVs, MUVs, MPVs, crossovers and any utility vehicle with ground clearance over 170 mm will attract a flat 40% GST with no compensation cess.
That compares with the current 28% GST plus a cess of up to 22%, which yields an effective tax burden of 45–50% today. Large hybrids also shift into the 40% slab.
Goods carriers, chassis fitted with engines, and cabs or bodies for motor vehicles all come down to 18% from 28%, and most tractors drop to 5% from 12% (with large road tractors above 1,800 cc now at 18%). Ambulances are cut to 18% from 28%, while tanks and armoured fighting vehicles are slashed to 5% from 12%.
Not everything gets cheaper. Yachts, pleasure vessels and aircraft for personal use now face a sharp jump to 40% from 28%, and powerful motorcycles above 350 cc also move up.
But for most categories, the direction is downwards and simpler. By merging the cess into GST, the government has kept the overall incidence broadly the same for premium goods while giving mass-market segments their first real relief in years.
Industry insiders say the timing is deliberate. With the festive season looming, automakers like Mahindra and Mahindra, Tata Motors, Skoda have already started announcing price cuts across models to capture early demand and signal that tax savings will be passed on to buyers. Discounts range from a few thousand rupees on entry-level hatchbacks and commuter bikes to well over Rs 5 lakh on some premium SUVs.
Industry executives say they want to capture the early festive-season momentum, clear inventories built up over the monsoon months, and send a clear signal that lower taxes will be passed on to buyers in full. This, they hope, will nudge fence-sitters back into showrooms and jump-start demand ahead of Diwali.
Gaurav Vangaal, Associate Director at S&P Global Mobility, says that following the tax reforms, S&P Global Mobility is revising its India forecasts upward.
“We expect an addition of 2 lakh vehicles in production, representing about a 3–4% growth in the next calendar year. We also see 1 lakh vehicles sales to be added, taking the expected growth rate up to around 8%. For 2025, we are still cautious and we’d like to wait to see how the market reacts,” he says.
The reason is the GST changes have created a temporary lull as both consumers and dealers wait for clarity. “We will see some loss in volumes during this process because people tend to hold their purchases. But the pent-up demand should come back and if it crosses expectations, 2026 numbers will look even better,” he adds.
Mass Market Relief
Hemal N Thakkar, Senior Practice Leader & Director, Crisil Intelligence, said that the GST cuts could transform the market dynamics at the bottom of the pyramid.
“For sub-4 metre cars, there should be an 8-8.5% reduction in price. This segment has been suffering for a long time and needed a rev-up desperately. Incomes haven’t grown, BSVI norms, insurance norms, crash regulations etc. have pushed up prices by 40–50% in just four to five years, and petrol costs stayed above Rs 100. This is the first real relief,” he said.
Experts say models like Maruti Suzuki WagonR, Maruti Suzuki Dzire, Tata Punch, Tata Tiago, Tata Tigor, Tata Altroz will see substantial price cuts. The impact will be more modest on compact SUVs such as Brezza or Creta, which are likely to see only a 3–3.5% price drop.
Larger MPVs and premium SUVs like the XUV700 or Innova could get a 6–7% cut, though Thakkar believes that demand here is relatively price-inelastic. “Maximum positive impact will come from small cars. Even the used-car market will see the gap narrowing, making new cars more attractive,” he explained.
CRISIL has already revised its passenger-vehicle forecast upwards. After cutting its projection to –2% to 1% in June-2025, it now expects 2–3% growth in FY26. “You’ll see pent-up demand (as few customers have been holding up in anticipation of GST cuts) and festive demand coinciding,” Thakkar added.According to Vangaal, GST relief is good news, especially for small carmakers.
“For a decade, India’s entry-level car market has been under pressure, squeezed by rising costs and stricter emission norms. But the definition of “entry-level” has shifted. Today’s first-time buyer is more likely to purchase a compact crossover than a bare-bones hatchback,” he said. He added that the key takeaway is also that the upgraders from two-wheelers, a segment that had almost disappeared, could now re-enter the market.
“There was a serious concern that people were not buying small cars and some were buying two-wheelers. Now some of them might shift back to cars,” Vangaal explains.
Thakkar says that entry-level passenger vehicles are a category that has suffered the most from BS6 norms, rising input costs and high fuel prices. That’s significant, because for years new small cars have been priced so high that many buyers shifted to the used-car market.
“If one was getting a new Alto for Rs 5.1 lakh but could buy a pre-owned Baleno for Rs 5.5–6 lakh, they’d choose the pre-owned Baleno. Now that differential shrinks, making new cars more attractive,” Thakkar says. This, he adds, is good for small car manufacturers like Maruti Suzuki, Hyundai India and Tata Motors Passenger Vehicles.
In contrast, the mid-SUV segment, vehicles like Maruti Suzuki Brezza and Hyundai Creta, will only see a 3.5% cut. He expects sub-compact SUVs (<4m and up to 1200cc petrol and 1500cc diesel) to start showing better growth than mid-SUVs, reversing the recent trend where mid-SUVs outsold other SUV segments. “The real volume impact will come from small cars and sub-compact SUVs,” he says.
For two wheelers, the reforms simplify GST and cess compliance leading to price reductions for motorcycles under 350cc, which make up the bulk of the market. Thakkar says that two-wheelers below 350cc are also set for a nearly 8% price cut, covering most of the commuter segment.
“This should help bring back demand in motorcycles and scooters, which had slowed down. It’s also a psychological boost because festive season purchases are around the corner,” Thakkar said. Above 350cc, the rate has gone up to a flat 40% but with input credit benefits and lower compliance burden.
According to FADA President C.S. Vigneshwar, in the medium and long term it’s a great move. “It’s really going to help from a demand perspective, especially because prices of entry-level vehicles are dropping substantially. Hopefully it’s going to bring down inflation and make vehicles more accessible for people. Customers will see price corrections, demand will bounce back, and money circulation will improve,” he said.
In the long run, CAFE III will define how product development cycles shape up, not GST rate cuts. “We don’t yet have complete clarity on CAFE III yet which will be applicable from 2027. Global automakers like Hyundai, VW and Renault might be able to adapt faster because of global product portfolio.
Major Indian players have been waiting for complete clarity on CAFÉ as that’s important from their long-term product strategy perspective,” Thakkar said. “Long-term policy clarity is critical. Without that, OEMs can’t invest with confidence.”
Hidden Nudge Toward Hybrids
The biggest beneficiary of the GST tweak may be hybrids, especially small hybrids under 4 metres. Models like the Baleno and Fronx are expected to get hybrid versions and Maruti may take back market share from rivals. Toyota, too, stands to benefit.
By 2030, Vangaal projects hybrids could reach 20% of the market—far higher than today’s negligible shSare. “Taking a bet on a smaller hybrid makes sense for an OEM now,” he says. While the reforms gave no direct sops to current hybrids (Toyota’s and Maruti’s larger models now drop from 43% to 40% GST), Thakkar sees a “hidden message” that sub-4-metre hybrids, whether combustion-only or hybrid-electric, will now be taxed at 18%. “That’s an incentive for companies to build smaller hybrid cars,” he says. Global majors, with access to technology, can move fastest. But he acknowledges the criticism: many “strong hybrids” have only a 0.75–1 kWh battery offering 6–7 km on electric power.
For Indian city users, however, that still improves mileage and cuts operating costs. Also, in the current context where there is an anticipated increased in ethanol blending leading to drop in mileage; customers could look at it as a lucrative option. Thakkar sees plug-in hybrids (PHEVs) and range-extenders as the real opportunity.
“A plug-in hybrid giving 90–120 km on electric plus petrol back-up would be a fantastic product,” he says, adding that many players are already exploring this in the near term to manage CAFE norms and reap benefits of lower GST. Also, a lower 18% GST rate for sub-4 metre hybrids, which could incentivise Maruti and Toyota to bring smaller hybrids to market.
EVs Still Hold an Edge?
Some are worried that GST cuts on ICE vehicles is a disadvantage for EVs, but Thakkar disagrees. “Taxes on GST remains the same at 5%. With E27, CAFE III norms and upcoming BSVII regulations, ICE vehicles will get costlier while EV scale will build out.
In the short-term ICE may get some benefit on account of recent GST cuts; however in the mid-term cost advantages will play out in favour of EVs as they may not be impacted on account of added costs of E27, CAFE III and BSVII” he adds.
Vangaal, on the other hand, has tempered expectations from the BEV segment. “Despite seven years of incentives—including 5% GST, income-tax rebates, road tax waivers, and Production-Linked Incentive (PLI) scheme, EV penetration is stuck at around 4%.
With COP29 approaching and India’s crude oil consumption still high. It’s time to opt for alternatives,” he says. Tata has bet solely on EVs with no hybrids for two years, while Maruti readies a hybrid pipeline, a split that could reshape India’s powertrain landscape.