GST 2.0 Impact on Cars – Reduced Prices For Hatchbacks to SUVs

The New GST Reforms rollout, effective September 22, 2025, marks a bold new chapter for India’s automotive sector. This sweeping reform simplifies the tax structure across vehicle categories and significantly reduces prices for most cars, from compact hatchbacks to mid-sized SUVs. The changes come as a boon for car buyers, manufacturers, and dealers, promising to stimulate demand and revive the industry after a period of sluggish growth.

This article examines the GST 2.0 impact on cars, focusing on how tax restructuring affects prices, which vehicles benefit the most, and what it means for the Indian consumer

What is GST 2.0 and Why It Matters for Cars?

The Goods and Services Tax (GST) Council implemented GST 2.0 as a second-generation overhaul of the country’s indirect tax system. It replaces the previous multi-tier rate system with a streamlined structure, eliminating complex compensation cess slabs that often pushed effective tax rates over 40% for many vehicles.

The new GST framework simplifies taxation into three key slabs for the automobile sector:

• 5% GST for electric vehicles and essential goods
• 18% GST: Applies to hatchbacks and small cars (under 4 meters, having engine capacity upto 1200cc in petrol or upto 1500cc in diesel).
• 40% GST: Applies to larger cars, SUVs, and luxury models

This simplification not only makes tax compliance easier but also brings substantial price relief to consumers by removing additional cess and reducing GST rates on many vehicles

Old Vs New GST Reforms Comparison

Category/Type	Old GST Rate (GST+cess)	New GST 2.0 Rates	Difference
Up to 4mt, up to 1200cc petrol engine	29% (28% + 1%)	18%	11%
Up to 4mt, up to 1500cc diesel engine	31% (28% + 3%)	18%	13%
Cars with 1201cc to 1500cc engines	45% (28% + 17%)	40%	5%
Cars with 1500cc+	48% (28% + 20%)	40	8%
4mt + UVs (170mm GC and above), 1500cc+	50% (28% + 22%)	40	10%
Up to 4mt Hybrid, up to 1200cc petrol engine & up to 1500cc diesel engine	28% GST Only	18%	10%
Hybrid with 1200cc+ petrol engine and 1500+ diesel engine	43% (40% + 3%)	40%	3%
Electric Cars	5%	5%	–

New GST Reforms Impact on Hatchbacks

The most significant beneficiaries of New GST Reforms are small cars — petrol engines up to 1,200cc, diesel engines up to 1,500cc, and vehicles not exceeding 4 meters in length. These vehicles now attract 18% GST, down from an effective 29-31% under the old regime including cess.

Popular models benefiting include:

• Maruti Suzuki Alto, Swift, Dzire
• Hyundai Grand i10, i20
• Tata Tiago, Altroz
• Renault Kwid

Price reductions for these cars are estimated to be in the range of 11-13%, translating into savings of ₹40,000 to ₹67,000 on models like Wagon R and Swift. This tax relief is expected to boost demand among first-time buyers, budget-conscious families, and middle-income groups, reversing a five-year decline in small car sales.

New GST Reforms Impact on SUV Segments

Compact and Sub-4-meter SUVs : More Affordable Now

Sub-4-meter petrol SUVs powered by engines smaller than 1,200cc, such as the Hyundai Venue, Kia Sonet, Tata Punch, and Nexon, will see GST reduced to 18% from an effective 45-50% earlier (GST + cess combined). This translates to a significant price drop averaging about 5-10%, lowering the entry barrier for compact SUV buyers

Large Cars and Midsize SUVs: No Longer Costly Outliers

The tax rate for large cars, including premium SUVs and luxury vehicles, is now fixed at 40%. Previously, these category cars attracted a GST of 28% plus cess between 17-22%, resulting in an effective rate of up to 50%.

Despite the rate hike from 28%, the removal of cess results in a net tax decrease. For example, the Mahindra XUV700, Toyota Fortuner will become more affordable by roughly 8-10%, thanks to the cess abolition.

SUVs dominate India’s automotive market, and GST 2.0 has impacted them across categories:

• Entry-level SUVs: Fall under the 18% GST rate → significant affordability boost.
• Midsize SUVs: Now taxed at 40% → moderate price reduction due to cess removal.
• Large SUVs: Continue at 40% → marginal price relief compared to earlier 50% taxation.

GST 2.0 Impact on Luxury Cars

Luxury vehicles and high-end SUVs face a mixed outcome under GST 2.0.

• Previously, luxury cars were taxed at 45–50% (GST + cess).
• Under GST 2.0, they are streamlined into a flat 40% slab.
• Brands like Mercedes-Benz, BMW, Audi, and Jaguar Land Rover now enjoy a slight tax reduction, though their pricing still keeps them in the premium bracket.

Additional Key Highlights on GST 2.0 Impact on Cars

• Electric Vehicles (EVs): Retaining the concessional 5% GST rate keeps EV prices stable, supporting India’s green mobility goals. This favours electrification but also means smaller petrol cars now come closer in price, affecting competition dynamics.
• Two-Wheeler Market: Motorcycles up to 350cc are taxed at 18%, resulting in price cuts, while motorcycles above 350cc face a 40% GST, increasing prices of premium bikes like Royal Enfield and KTM models.
• Commercial Vehicles and Auto Components: GST rates for trucks, buses, three-wheelers, and auto parts have reduced to 18% from 28%, lowering costs for logistics operators and automakers, potentially boosting fleet sales.
• Industry Outlook: Manufacturers expect a 10-20% rise in demand post-GST 2.0 implementation. Maruti Suzuki projects a 10% growth specifically in small car sales this fiscal, signaling optimism for the automotive sector overall.
• Festive Season Boost: Launch aligning with Navratri and festive celebrations positions GST 2.0 to capitalize on increased consumer spending, further driving sales

Why GST 2.0 Is a Game-Changer for Buyers

The new tax reform delivers several benefits:

1. Lower Prices – Hatchbacks and compact SUVs are now significantly cheaper.
2. Simplified Taxation – Easy-to-understand GST slabs reduce confusion.
3. Higher Accessibility – First-time buyers gain the most.
4. Market Growth – Lower car prices are expected to fuel higher sales volumes

Also Read: India’s move towards E20 Fuel by 2025

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