RECENT GST RATE CHANGES IMPACT ON AUTOMOBILE SECTOR

GST AND ITS ORIGIN

Goods and Service Tax widely known as GST is an indirect tax imposed on the supply of goods and services. It is a multi-stage, destination-oriented tax that is applied at every step of value addition in the supply chain, replacing multiple Indirect taxes in India.

Originally, introduced in India in 2000 after a committee was set up by then Prime Minister Shri Atal Bihari Vajpayee, a task force, headed by Finance Minister Mr. Vijay L. Kelkar, but constitutionally came into force by the 101^st Amendment Act of 2017, introduced by then Finance Minister Mr. Arun Jaitely.

GST fosters barrier-free movement of goods and helps in realising “One nation, one market” and “one taxbase and one tax”.The unified tax structure and increased compliance have led to better tax collections, benefiting both the Central and State governments.

GST 2.0

At the 56th meeting of the GST Council, chaired by Union Finance Minister Smt. Nirmala Sitharaman approved Next-Gen GST reforms, with focus on improving the lives of the common man and ensuring ease of doing business for all, including small traders and businessmen.

The previous four-tier structure (5%, 12%, 18%, and 28%) has been largely replaced by a two-slab system: a 5% merit rate for essentials and a 18% standard rate for most other goods and services.

A new 40% demerit rate was introduced for luxury and “sin” goods like tobacco and high-end cars, replacing the earlier 28% plus cess.

7-Pillars of Next-Gen GST Reforms

The 7 pillars of the Next-Gen GST reforms (referred to as “GST 2.0”) unveiled in September 2025 are a set of initiatives designed to simplify India’s tax system, boost the economy, and reduce the burden on citizens and businesses. 

The seven pillars are: 

• Pillar 1: One Nation, One Tax Building on the foundation of the original GST by expanding the taxpayer base and maintaining a unified tax system across India.
• Pillar 2: Simpler Two-Tier System (Rate Rationalization) Rationalizing the existing multi-tier slab structure into a primary two-slab system (5% and 18%), with a separate 40% rate for sin/luxury goods, to ensure fairer and more transparent taxation.
• Pillar 3: Smoother Duty and Refunds Improving the ease of compliance by correcting inverted duty structures and expediting the processing of refunds, especially for exporters (with 90% upfront provisional refunds).
• Pillar 4: Tech-Enabled Filing Integrating technology to enable digital-first compliance, including easier registration for small businesses, mandatory e-invoicing for a wider base, and AI-driven risk detection.
• Pillar 5: Consumer Focus (Ease of Living) Focusing on households by reducing taxes on essential goods, life-saving medicines, health/life insurance premiums, and various consumer durables to boost affordability and demand.
• Pillar 6: Empowering MSMEs Lowering input costs on items like cement, auto parts, and handicrafts to make micro, small, and medium enterprises more competitive, while also simplifying compliance procedures for them.
• Pillar 7: Strengthening States through Revenues Ensuring revenue stability and sustainable growth for states, partly by expanding the tax base and improving overall compliance and collections through the other reforms. 

GST on Automobile

Cars are covered in the scope of supply as defined by the GST law without any exemption. However, vehicles used by physically disabled persons are exempted from GST.

Introduction of GST in Automobile sector has transformed vehicle taxation in India by replacing earlier complex structure of multiple taxes such as excise duty, VAT, and various state-level levies making it more efficient.

In the 56th GST Council meeting (3rd September 2025), important changes were introduced for the automobile sector, making small cars more affordable while luxury and larger hybrids became costlier. 

Impact of new GST rates on the Automobile Industry

The implementation of new GST 2.0 has brought significant transformation to the automobile industry making it more efficient. The elimination of compensation cess on most vehicles and the rationalization of tax rates is expected to lower prices which will directly benefit the consumers.

	Changes in GST Rates	Impact
Small Cars	Reduced from 29-30% to a uniform 18%.	Likely to drive higher demand at entry-level segment, making cars more affordable for a broader audience.
Luxury Vehicles and SUVs	Increased from 28% to 40%; Compensation cess (up to 22%) removed.	Reduction in overall tax burden by removal of compensation cess; simplifies tax framework and resolves classification issues.
Buses, trucks, 3-wheelers	Reduced from 28% to 18%	Making them more affordable

New GST Rate on Cars (Effective from September 22, 2025)

Description	Old Rate	New Rate
Petrol, LPG, or CNG motor vehicles up to 1200 cc and length up to 4000 mm	28% + 1% Cess	18%
Diesel motor vehicles up to 1500 cc and length up to 4000 mm	28% + 3% Cess	18%
Motor cars and other passenger motor vehicles (other than above listed)	28% + 15-22% Cess	40%
Hybrid vehicles (spark-ignition + electric motor) up to 1200 cc engine and length up to 4000 mm	28% + 1% Cess	18%
Hybrid vehicles (spark-ignition + electric motor) over 1200 cc engine or length over 4000 mm	28% + 15-22% Cess	40%
Hybrid vehicles (compression-ignition + electric motor) up to 1500 cc engine and length up to 4000 mm	28% + 3% Cess	18%
Hybrid vehicles (compression-ignition + electric motor) over 1500 cc engine or length over 4000 mm	28% + 15-22% Cess	40%
All categries of electric motor vehicles	5%	5%

Let’s consider an example of Diesel motor car below 1500cc with length up to 4000mm

Particulars	GST at Old Rate	GST at New Rate
Ex-Showroom Price	10,00,000	10,00,000
GST Old @28%	2,80,000	–
GST New @18%	–	1,80,000
Cess @3%	8,400	–
Total Taxes	2,88,000	1,80,000

Exemptions of GST Rates on Car

Indian government offers special GST concessions on four types of vehicles to promote affordability, accessibility, and sustainability.

1. Electric Vehicles (EVs) – In this section only 5% GST is applicable. The intention is to promote green mobility.
2. Ambulances – 18% GST, reducing costs for hospitals
3. Used Cars – GST applies only on the profit margin, not the full price. No tax applies if sold at a loss, making pre-owned cars more cost-effective.
4. Vehicles for Persons with Disabilities – GST discounts lower prices for specially designed vehicles, ensuring better mobility and independence

Input Tax Credit on Motor Vehicles

Section 17(5) talks about blocked credit and thereby disallows ITC on certain motor vehicles. ITC is not available on motor vehicles used for transport of persons with a seating capacity of less than or equal to 13 persons including the driver. ITC is available when vehicles are used for below purposes:

Lets elaborate on the availability of ITC on cars:

1. Employer giving the car to the employee for business use- As per section 17(5), clause (a) and clause (aa), ITC can be claimed on motor vehicles used for business purposes. If the car is given to the employee for personal use, then ITC cannot be claimed.
2. ITC on demo cars (at showrooms)- The general rule is that the ITC of motor vehicles with a seating capacity less than 13 persons are blocked as per section 17(5). But, in the case of car dealers, the demo car is not purchased with an intention for retail sale. So, it can be treated as a capital asset, and full ITC can be claimed.
3. ITC on renting of cars for business or employee transport- As per section 16(1), all registered persons can claim ITC on goods or services used in the course or furtherance of business. Also, ITC is available on leasing/renting of motor vehicles with seating capacity more than 13 persons as per amended section 17(5). Thus, in this case, an employer can claim ITC on GST charged by the service provider to rent motor vehicles only if the approved seating capacity is greater than 13 persons.
4. Transport business purchasing cars for passenger transport service or cabs- If a person is in the transportation of passengers, he can claim ITC on such vehicle purchase.

GST on Import of Cars

Import of cars attracts IGST. The value considered for calculating IGST is the assessable value + basic customs duty.

To promote ‘Make in India’, the government has increased customs duty on imported cars:

• Semi knocked down kits of passenger vehicles- Increased to 30% from 15%.
• Completely knocked down kits of passenger vehicles- Increased to 15% from 10%.

Customs duty is included in the value for charging IGST. This will lead to an increase in IGST amount as well. Thereby increasing the overall price of the product.

Conclusion

GST 2.0 has brought a major transformation to automobile taxation in India. By simplifying the tax slabs and eliminating the Compensating Cess the government has enhanced transparency. Lower tax rates especially on small cars and EVs have made it more affordable for consumers, which will stimulate the demand in the market and sustain growth in the automobile sector. The introduction of flat slab of 40% and eliminating compensation cess on luxury cars have streamlined taxation and lowered the overall tax burden.