The Centre has proposed a sharp reduction in goods and services tax (GST) rates on entry-level two-wheelers, small cars and hybrid passenger vehicles — a major move that could ease the burden on middle-class homes and boost demand in the automobile sector.As per sources, the proposal comes in the backdrop of Prime Minister Narendra Modi’s recent Independence Day announcement on ushering in a two-tier GST structure — a reform billed as the “next generation of GST,” expected to take shape by Diwali, as per sources.The Centre’s proposal seeks to simplify the tax structure by addressing long-standing classification issues in the automobile sector, sources told CNBC-TV18. At present, vehicles are taxed under multiple slabs, combining GST and cess depending on engine size, length, and ground clearance. The new proposal aims to bring parity and reduce rates for mass-market segments.
Key proposals under consideration
Two-Wheelers (engine capacity below 350cc): GST rate to be cut from 28% to 18%.
Small Cars (below 1200cc engine capacity): GST + cess of about 29–31% to be reduced to 18% flat.
Hybrid Passenger Vehicles (up to 4m length & 1200cc petrol / 1500cc diesel engines): GST to be reduced from 28% to 18%.
Other Passenger Vehicles (big cars, luxury cars, SUVs): To remain under the highest bracket of 40%.
Current vs Proposed GST Rates
CategoryCurrent GSTProposed GSTTwo-wheelers <350cc 28% 18%Two-wheelers >350cc 28%3% UnchangedSmall cars (<1200cc petrol, <1500cc diesel, upto 4m length) 28%1–3% cess (29–31%) 18%Hybrids (upto 4m, 1200cc petrol / 1500cc diesel)28% 18%Hybrids (above 4m or above 1200cc/1500cc)28%15% cess (43%) UnchangedPassenger vehicles (upto 1500cc)28%17% cess (45%) UnchangedPassenger vehicles (above 1500cc) 28%20% cess (48%) UnchangedSUVs (above 4m, >1500cc, >170mm ground clearance)28%22% cess (50%) Unchanged
Rationale behind the move
Government officials argue that reducing GST on two-wheelers and small cars will provide relief to middle-class buyers, stimulate consumption, and correct anomalies in the current tax system where small cars are taxed almost on par with luxury SUVs. The step is also aimed at providing a fillip to India’s auto sector, which is one of the largest employers and contributors to the country’s GDP.“The proposal is designed to simplify GST rate slabs, reduce classification disputes, and align with the broader vision of a two-rate GST structure,” a source said.
Road Ahead
The Group of Ministers (GoM) on rate rationalisation, headed by Bihar Deputy Chief Minister Samrat Choudhary, is expected to deliberate on the proposal soon. Once cleared, the plan could pave the way for the two-slab GST regime — 5% for essentials and 18% for standard goods and services, with a 40% peak rate only for select luxury and sin goods.If implemented, these changes could mark one of the biggest overhauls in GST since its rollout in 2017, aligning taxation with consumption patterns and easing compliance. With the reforms expected to be finalised by Diwali, industry watchers believe this could be the much-awaited “big bang” GST reform.Also Read: India-US trade talks scheduled for Aug 25 postponed, 25% additional penalty on India likely to take effect on Aug 27(Edited by : Shloka Badkar)
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