The GST Council has approved a major overhaul of the Goods and Services Tax framework, simplifying most rates into a two-slab structure of 5% and 18%, while introducing a new 40% special slab for select luxury and sin goods. The new architecture, being referred to as “GST 2.0,” is scheduled to come into effect from September 22, 2025.
For the automotive sector, the headline outcomes are clear:
- Small, mass-market cars will receive a significant tax reduction.
- Larger cars, SUVs, and high-end motorcycles will be moved to the higher 40% slab.
- Electric Vehicles (EVs) will continue to attract a concessional 5% GST.
These recommendations were issued after the 56th GST Council meeting and are intended to stimulate consumer demand and simplify the tax structure. This is a focused, practical guide on the new GST rates for cars, what “GST 2.0 on cars” actually changes, how GST on luxury cars in India is affected, and what buyers and dealers should watch for next.
What the Council Announced (Quick Facts)
- The GST Council recommended the new slabs and measures at its 56th meeting. The implementation date is set for September 22, 2025.
- The revised tax architecture consists of three main rates: 5% (concessional/essential goods), 18% (standard), and a 40% special slab for luxury and sin goods.
- For automobiles, small cars and motorcycles up to 350cc are shifted to the 18% rate. Mid/large cars and most SUVs are moved to the 40% slab.
- Electric vehicles (EVs) will continue to attract 5% GST, a clear signal of continued government support for green mobility.
- The previous system of a flat 28% GST plus a variable compensation cess has been rationalized to simplify the tax burden.
The Headline Change for Cars – Simplified Table
| Vehicle Category (Tax Rule Snapshot) | Typical Pre-Change GST/Cess Mix | New GST Slab from 22-Sep-2025 | What it Means in Plain Terms |
| Small petrol cars (≤4.0m / petrol ≤1,200 cc) and small diesel cars (≤4.0m / diesel ≤1,500 cc) | 28% + applicable cess (varied, up to 3%) | 18% | Significant price relief for mass-market small cars and a likely boost in sales. |
| Mid/large cars, SUVs, >1,500 cc or >4.0 m (and motorcycles >350cc) | 28% + high cess (effective ~43–50%) | 40% (no cess) | Luxury & big SUVs remain heavily taxed, but the structure is simplified. Some may see a marginal price drop due to the cess removal. |
| Electric vehicles (EVs, all sizes) | 5% (concessional) | 5% (unchanged) | Continued support for EV uptake. This removes any uncertainty about future tax hikes. |
| Car parts & accessories | Various (12%–18%–28%) | 18% | The tax on aftermarket parts and components is now uniform, which may simplify service and repair costs in the medium term. |
Note: The precise definitions for vehicle categories (engine cc, length, ground clearance) will be detailed in the upcoming Central Board of Indirect Taxes and Customs (CBIC) notifications. State-level registration fees and road taxes will also affect the final on-road prices.
How Big Will Retail Prices Move? (Best Available Estimates)
- For small cars, industry analysts and auto trade estimates point to a meaningful price fall of ~10–13% on ex-showroom prices for affected models. This is a combination of the reduced GST and the removal of the cess.
- For larger cars and SUVs, the shift to a flat 40% slab may result in a minor price reduction, as the new rate is lower than the previous effective tax rate (which could be as high as 50% including cess). Many large cars will remain expensive, but the simplified structure provides more clarity.
- Electric vehicles are a clear exception. By keeping the GST at 5%, the government has reassured buyers and manufacturers that the tax advantage for EVs will continue, supporting the clean mobility push.
Why the Government Did This (and Why it Matters Now)
The GST Council framed this as a simplification and demand-stimulation measure. By cutting rates on many mass-use items and small vehicles, the government aims to boost consumption, especially ahead of the festive season. At the same time, it is protecting revenue by concentrating higher rates on luxury and sin goods. For the auto sector, this move is a deliberate attempt to revive the small car segment, which has been losing market share to SUVs.
What This Means for Different Audiences
Buyers (Self-drive & Fleet)
- If you’re considering a small/mass-market car: Prices are set to become measurably cheaper after September 22. It is advisable to compare current quotes with post-cut prices and ask dealers about their “GST 2.0 pass-through” policy.
- If you’re considering a luxury SUV or big car: Don’t expect a massive price cut. Taxes remain high at 40%. Your negotiation should focus on on-road extras, accessories, and financing offers instead.
- For EV buyers: The decision to retain the 5% GST rate improves the calculus. Manufacturer incentives combined with this tax advantage will make EVs more attractive.
Dealers & OEMs
- OEMs will decide on a model-by-model basis how much of the GST saving to pass on to customers. This may involve selective price adjustments and short-term promotional offers.
- The upcoming CBIC notifications will be crucial for understanding transitional supplies, Input Tax Credit (ITC) adjustments, and dealer accounting procedures.
Finance & Used-Car Markets
- Lower GST on small cars and a harmonized 18% tax on parts will simplify margins and could reduce medium-term repair and servicing costs.
- Residual values may shift; small cars could hold their value better if demand picks up rapidly.
Caveats & Things to Watch (Read the Fine Print)
- The official legal notification from CBIC will be key. Read it for precise details on transitional rules and ITC adjustments.
- State-level actions matter. Registration fees and road tax policies can offset or amplify the central GST changes. Always confirm the final on-road price with your dealer.
- The OEM pass-through is not automatic. While most are expected to pass on savings, some may absorb part of the gain for market share.
Practical Checklist – What to Do Before September 22
- For small car shoppers: Get a current quote and be ready to compare it with a post-cut quote.
- For luxury/SUV hunters: Assume the tax remains high and focus your negotiations on finance, warranty, and service packages.
- For EV buyers: Expect stable GST benefits. Check for updated offers from manufacturers and dealers.
- For corporates and fleet managers: Revisit your total cost of ownership (TCO) models, as savings on small cars may change your fleet mix choices.
Quick Take – Winners and Losers (One-Line)
- Winners: Small cars, two-wheelers up to 350cc, essential goods, commuters, and EVs.
- Neutral/Losers: Large cars and some luxury SUVs (tax remains high), and motorcycles above 350cc (now taxed at 40%).
Final Verdict & Next Steps
This is a significant structural change. The new GST rates for cars, effective from September 22, 2025, simplify the tax slabs, provide immediate relief to small car buyers, and maintain a firm fiscal boundary around luxury goods. The ultimate benefit to the consumer will depend on OEM pricing strategies and state-level taxes. For all stakeholders, the immediate priority is to verify final on-road quotes after September 22 and understand the transitional rules in the official CBIC notification.
Stay informed with the latest updates on GST. Follow Motozite for real-time information. Call us now to get the exact price difference on your new car!