GST Reform Impact on Small Cars: On the occasion of Independence Day, the Prime Minister announced the improvement in Goods and Service Tax (GST Reforms), since some special items and services are being discussed across the country. PM Modi told the race of Red Fort that this GST reform can be done before Diwali in October, which will be like Diwali gift for the common man. This GST reform also includes vehicles, whose prices are expected to fall a huge fall.
According to a recent HSBC report, the possible decrease in GST on vehicles in India can reduce the prices of small cars significantly. The report suggested that if the GST rate on small cars is reduced from the current 28% to 18%, then the prices of these vehicles can be reduced by about 8%.
It is being told that the Central Government has proposed to improve the GST slab and if this proposal is considered, then the price of small cars will be reduced strongly. With this, the auto sector can get strong benefits on the occasion of the festive season. Provided that this announcement in GST reform should be declared before Diwali. This time Diwali will be celebrated on 20 October. Most of the people in India bring new vehicles to their house on this Dhanteras and Diwali.
At present, passenger vehicles are levied from 28% to 50% GST tax, which depends on the size, fuel type and engine capacity of the vehicle. Apart from GST, cess is also imposed on these vehicles, which is 1% to 5%. This increases the price of vehicles even further. It is reported that small cars, on which currently 28 percent GST and 1-3 percent cess rates are applied, after new changes, these 18 percent tax can come in the tax slab.
The report estimated a potential decline of 8% in the prices of small cars, while the prices of large cars are expected to reduce by 3% to 5%. The report also said to consider the possibility of uniform cut in GST. If GST on all vehicle categories is reduced from 28% to 18%, then prices may benefit from about 6% to 8% for all cars.
Revenue reduced by $ 6 billion
However, maintaining the existing cess ie ‘CESS’ on the basis of the size of the vehicle means that such a situation is less likely. The report also pointed towards the possible loss in the government treasures. According to which the government will face a decline in revenue between an estimated 5 billion to 6 billion US dollars due to any comprehensive tax deduction.
The report also suggested a revised taxation mechanism, under which small cars can be taxed at a lower rate of 18%, while a “special rate” of 40% can be applied to large vehicles, and the existing cess will be abolished. The purpose of this proposal is to customize the method of taxation according to the size and type of vehicles. So that the market remains balance.
The biggest buyer in this segment
India has the highest demand for cars ranging from 1000 cc to 1500 cc (1.0 liter to 1.5 liter engine). Which includes SUVs like 10 to 10 to Hyundai Creta of Maruti Auto. If only Mahindra Scorpio is excluded from the list of top 10 best selling cars of July, 9 out of 10 cars come between 1.0 liters to 1.5 liter engine capacity. From this you can guess how the common man will get the benefit of this improvement in GST.
How much GST is on cars at this time
For new vehicles, GST rates vary depending on the category and size of the car. Engine capacity up to 1200 cc and small petrol cars with less than 4 meters length levy 28% GST and 1% cess. Whereas small diesel cars (up to 1500 cc, less than 4 meters) are levied with 3% cess with 28% GST.
At the same time, 43% tax is levied on mid-size cars, 48% on luxury cars and 50% on SUVs. On the other hand, only 5% GST tax is applied to electric vehicles. Due to which they become more economical. Compared to the pre-GST era, tax burden on small cars and luxury cars has decreased, while mid-size cars have become a bit expensive.
| Vehicle category | Engine capacity and length | GST rate | Cess | Total tax |
| Small petrol cars | Up to 1200 cc, less than 4 meters | 28% | 1% | 29% |
| Short diesel cars | Up to 1500 cc, less than 4 meters | 28% | 3% | 31% |
| Mid-size cars | 1200 cc (petrol) and 1500 cc (diesel) | 28% | 15% | 43% |
| Luxury cars | Up to 1500 cc | 28% | 20% | 48% |
| SUV vehicle | Up to 1500 cc, over 4 meters | 28% | 22% | 50% |
| Electric vehicle | All capacity | 5% | 0% | 5% |
The market of small cars will be careful
In the last few years, the business of entry level small cars has been badly affected. Entry level cars coming at a price less than Rs 5 lakh, whose sale was from 10 lakh units in the financial year-16, has come down to 25,402 units in the financial year 25. The share of hatchback cars in the total car sales has been reduced by half, which has come down from 47 percent to 24 percent in 2020. In such a situation, if the tax burden on small cars is reduced, then people will be vocal towards these cars and their sales are expected to increase.
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