MUMBAI: Small car prices may decrease by up to 10% if the applicable tax slab is reduced from 28% to 18%.
As part of the wider reforms to boost economic growth, the centre has proposed moving from four tax slabs to a simplified two-rate system: 5% for essential items and 18% for most other goods. Luxury and sin products are likely to face a steeper levy of around 40%.
“Cars currently are under the 28% GST band and if GST is rationalised to 18% then prices for entry-level cars can come down by 8-10%. Players like Maruti, Hyundai and Tata Motors which have a strong entry-level portfolio are likely to be the key beneficiaries,” Sunny Agrawal, Head Fundamental Research at SBI Securities told TNIE.
At present, vehicles are taxed under multiple slabs combining GST and cess. Small cars are taxed at 28%, whereas large cars (above 4 meters in length and 1200cc in engine size) are taxed (including cess) in the range of 43-50%.
As per reports, the government is weighing a flat 18% levy on smaller cars and two-wheelers whose engine size is below 350cc. Luxury cars and sports utility vehicles are expected to fall under the higher 40% bracket.
Industry experts believe that the rate cut will provide a major boost to the small car segment, as prices in this category have increased by 50% to 80% over the past six years, making them unaffordable for many buyers.
The government’s decision to reduce GST comes amid noticeably weak auto demand in the first four months of FY26. Car sales have declined by 1%, while two-wheeler sales are down 4% compared to the same period in FY25.
Global financial firm HSBC estimates that the proposed tax reforms could result in around an 8% drop in the prices of small cars. It added that bigger cars could also become cheaper in the range of 3-5% if the change is implemented.
HSBC, however, stated that any reduction in GST slabs for vehicles (four and two-wheelers) could mean a loss of around $4-5 billion in GST collections for the government.
Meanwhile, the expectations of tax cuts on cars have put automakers in a tight spot as consumers have started deferring their purchase and even cancelling their bookings.
“The buyers have gone into the wait-and-watch mode. We are hopeful that the tax cut comes into effect before the festive season as any delay might result in lower sales and increased unsold inventory for us,” a senior executive of a leading car manufacturer told TNIE.
Analysts at Motilal Oswal Financial Services, who expect a 7% reduction in vehicle prices, stated that if these rates are not implemented soon, customers are unlikely to buy vehicles before this move in anticipation of the rate cut.
“At a time when OEMs were looking to push dealer stock in anticipation of a demand revival in the festive, this move is likely to put OEMs in a spot in the interim,” said the domestic brokerage firm.