The GST 2.0, which is the most important tax revision to take place in India in recent years, has finally kicked in from September 22. With this move, the Indian auto industry, especially the passenger vehicle segment, is expecting a major overhaul in the consumer sentiment and sales graphs.
The entry-level small cars that have always remained the backbone of the Indian passenger vehicle market for a long time and held a market share of around 74% in FY18, but lately, have witnessed the stake shrinking to about 22% in FY25 due to multiple factors. While the rise of SUVs has pushed back the hatchbacks to the back, the affordability crisis also played a crucial role.
However, with the GST 2.0 tax slabs announced earlier this month, kicking in from September 22, paired with the festive season offers, the segment has started showing signs of recovery since there has been an uptick in the number of bookings from consumers.
Interestingly, with the new GST rates taking effect, prices of the small cars are starting at under ₹4 lakh for the first time in nearly five years. This is raising the hopes for a turnaround in the affordable segment of the Indian passenger vehicle market after a slump in the last few years.
GST 2.0: New tax structure benefits small cars
The new tax structure under GST 2.0 benefits the small cars the most among all the passenger vehicles. The revised tax structure commands 18% GST on small cars, down from the 28% rate previously taxed. The small cars are defined by the engine size and length under the new tax regime.
The small cars define the passenger vehicles with engine capacity of up to 1200 cc for petrol models and up to 1500 cc for diesel ones. Also, the small cars are defined by the size of the vehicles. Under this new tax structure, the cars with a length of up to 4,000 mm command a GST of 18%.
Besides the 10% GST reduction, the government has abolished the 1-3% compensation cess as well. With this revision the total tax incidence on small cars has come down significantly.
GST 2.0: Automakers have slashed car prices
The auto OEMs in the country have already announced price cuts for their respective range of cars, following the announcement of GST rate cuts. With this, the automakers have passed on the benefits of the GST rate reduction to the consumers.
Coincidentally, the GST rate cut comes at a time when the festive season is beginning. Along with the price cuts induced by the GST rate revision, the automakers have announced festive offers as well, which are further expected to boost the demand and sales of the cars in India, especially helping the small car sales to revive.