GST Rate Cut on Cars, Bikes, Auto Parts from September 22: Small Vehicles to Get Cheaper, EVs Retain 5% Tax

The GST Council has announced a significant rationalisation of Goods and Services Tax (GST) slabs. The changes, which were finalised during the Council's 56th meeting, will come into effect from September 22, 2025, coinciding with the beginning of Navratri.

The Council has approved a two-slab GST structure, 5% and 18%, along with a higher demerit rate of 40% applicable only to super luxury, sin, and high-end goods. Among the sectors to benefit most from these reforms is the automobile industry, especially entry-level cars, two-wheelers, and auto components.

Small Cars and Entry-Level Bikes to Get Cheaper

As part of the revised tax structure, vehicles with smaller engine capacities will be moved to the lower 18% GST bracket, down from the previous 28%. This includes:

• Petrol, LPG, and CNG vehicles with engines up to 1,200 cc and lengths not exceeding 4,000 mm
• Diesel vehicles with engines up to 1,500 cc and the same length
• Motorcycles with engine capacities up to 350 cc

These changes are expected to make small cars and entry-level bikes more affordable, offering relief to middle-class consumers and potentially boosting sales volumes in the coming festive season.

Higher GST Rate for Larger, Premium Vehicles

On the other end of the spectrum, vehicles that exceed the defined thresholds - such as motorcycles above 350 cc, luxury SUVs, sports cars, and racing vehicles - will now be taxed at the maximum GST rate of 40%. This category will include vehicles:

• With engines above 1,200 cc for petrol/CNG/LPG
• Above 1,500 cc for diesel, or
• Those exceeding 4,000 mm in length

However, small hybrid cars are expected to receive concessional treatment under the revised structure, in line with the government's push for energy-efficient transportation.

Electric Vehicles (EVs) Retain 5% GST: Industry Welcomes Move

One of the highlights of the announcement is the continuation of a low 5% GST on electric vehicles (EVs). This is viewed as a key policy decision in supporting India's clean mobility mission.

Santosh Iyer, Managing Director and CEO of Mercedes-Benz India, welcomed the move as per The Hindu report, stating that maintaining a favourable tax rate for battery electric vehicles (BEVs) reinforces the government's commitment to sustainable and decarbonised transportation. He added that the rationalisation of GST across vehicle categories could serve as a demand catalyst.

Auto Components to Become Cheaper, Grey Market to Decline

In another significant move, the Council approved the reduction of GST on automotive components from 28% to 18%. This is expected to provide relief to manufacturers, particularly in the MSME sector, while curbing the unorganised and grey market.

From 50% Down to 18%: A Major Tax Overhaul

Prior to this reform, automobiles were subjected to a base GST of 28%, with additional compensation cess ranging from 1% to 22% depending on the vehicle type. This created an effective tax burden ranging from 29% for small cars to nearly 50% for luxury vehicles and SUVs.

The new tax regime, with only two slabs and a single demerit rate, represents a massive simplification of the GST system and a potential turning point for auto industry dynamics.

Middle-Class Relief Through GST Cuts on Essentials

Apart from vehicles, Finance Minister Nirmala Sitharaman also announced GST rate cuts on several daily-use items, with many essential goods for middle-class households shifting from the 18% or 12% bracket to just 5%. This decision aligns with the government's broader goal of reducing inflationary pressure and increasing disposable income for ordinary citizens.