Small cars, bikes up to 350 cc to get cheaper as GST reforms kick in

Small cars and entry-level bikes are set to get cheaper as the GST Council on Wednesday (September 3, 2025) approved a complete overhaul of the tangled Goods and Services Tax (GST) regime.

The GST Council approved limiting slabs to 5% and 18% effective from September 22, the first day of Navaratri.

Petrol, LPG and CNG vehicles of less than 1,200 cc and not more than 4,000 mm length and diesel vehicles of up to 1,500 cc and 4,000 mm length would move to the 18% rate from the current 28%.

Motorcycles up to 350 cc would be taxed at a lower GST of 18% against 28% currently.

All automobiles above 1,200 cc and longer than 4,000 mm as well as motorcycles above 350 cc and racing cars will be charged with a 40% levy.

Small hybrid cars will also benefit, while EVs will continue to be charged at 5%.

“Government listened to the automotive industry’s long-standing wish list of rationalising GST rates,” Mercedes-Benz India MD and CEO Santosh Iyer said in a statement.

This GST revision is the step in right direction, is progressive and will induce the much-needed impetus by boosting consumption and bring momentum to the automotive industry which essentially remains the pulse of the Indian economy, he added.

“We are thankful to the Government for keeping the GST rate for BEVs unchanged, ensuring faster transition to a decarbonised future, while reducing oil imports,” Mr. Iyer said.

Presently, automobiles are taxed at 28%, which is the highest GST slab.

A compensation cess, ranging from 1% to 22%, is levied on top of this rate, depending on the type of vehicle.

The total tax incidence on cars, depending on engine, capacity and length, ranges from 29% for small petrol cars to 50% for SUVs.

Besides, GST on auto components has been reduced to 18% from the current 28%.

“ACMA welcomes the government’s decision to bring all auto components under a uniform 18% GST slab — a long-standing recommendation of the industry,” Automotive Component Manufacturers Association of India (ACMA) DG Vinnie Mehta said.

This landmark reform will help curb the grey market, ease compliance, support MSMEs, and enhance the global competitiveness and resilience of India’s automotive component industry, he added.

“The move makes tractors and farm machinery more affordable for farmers, reduces costs for commercial vehicles and improves accessibility for personal mobility through rationalisation of rates across all SUVs. Together, these measures are expected to stimulate demand and drive inclusive growth across the entire ecosystem,” Rajesh Jejurikar, ED & CEO, Auto and Farm Sector, M&M, said.

The continuation of the 5% GST rate on EVs is a critical enabler of India’s clean mobility vision. This measure will further accelerate the adoption of electric vehicles and reinforce India’s leadership in sustainable, green transportation, Mr. Jejurikar said.

The GST panel approved simplifying the GST from the current four slabs of 5%, 12%, 18% and 28%, to a two-rate structure of 5% and 18%.

A special 40% slab is also proposed for a select few items.