India is preparing for one of its biggest tax reforms in recent years, targeting the Goods and Services Tax (GST) structure. If approved, the proposal will slash GST on small cars and two-wheelers from 28% to 18% and reduce GST on insurance premiums to between 5% and zero. The change, expected around Diwali, has the potential to reshape production planning and sales strategies for automobile manufacturers.
Source: Reuters. Read The Article
Impact on Small Cars and Two-Wheelers. Small cars and two-wheelers have traditionally been the backbone of India’s automobile industry, serving middle-class buyers who are highly price sensitive. However, in recent years, growth in these categories has slowed as buyers shifted toward SUVs, which now account for nearly half of passenger vehicle sales. By lowering taxes, the government aims to make small cars and two-wheelers more affordable, correcting the imbalance in demand and giving OEMs in these categories a much-needed boost.
For instance, Maruti Suzuki—which dominates the small-car space—could see demand return for entry-level models like Alto and Wagon R. Similarly, two-wheeler makers such as Hero MotoCorp, Bajaj Auto, and TVS Motor may benefit from renewed interest in commuter motorcycles under 350 cc. Together, these categories contribute nearly $20 billion annually to GST collections, highlighting their scale in the economy.
Simplification of GST Slabs. Currently, the auto industry works under a complicated tax system: a base GST of 28% plus a compensation cess (a tax for a specific purpose) ranging from 1% to 22%, depending on engine size, length, and body type. This creates effective rates of 29% to 50%. The new proposal introduces a much cleaner system—5 percent for essentials, 18% for standard goods (including small cars and two-wheelers), and 40% for luxury and “sin goods.”
For OEMs, this clarity reduces classification disputes, which have long created uncertainty in pricing and production planning. Simplified rates also ease compliance, allowing manufacturers to focus on efficiency, localization of components, and capacity expansion.
Production Outlook. With demand expected to increase, OEMs are likely to scale up production lines, especially in the mass-market segment. Plants that had been running below capacity due to sluggish small-car demand may see higher utilization. This could also trigger fresh investments in automation and component sourcing, benefitting ancillary suppliers in steel, plastics, tires, and electronics.
At the same time, the export potential of small cars could improve. India is already a hub for compact vehicle exports to Africa, Latin America, and parts of Asia. Lower domestic tax incidence means manufacturers can maintain competitive pricing while expanding overseas shipments. Hyundai, Suzuki, and Volkswagen already use India as an export base for small vehicles, and GST reforms may strengthen this position.
Broader Industry Implications. The reform goes beyond short-term sales gains. It signals the government’s intent to support the automobile industry, which employs millions and contributes significantly to GDP. Job creation across dealerships, logistics, and ancillary industries could follow if sales volumes increase. Insurance penetration, currently below 4 percent of GDP, may also rise, improving financial security for households and boosting business for insurers.
However, challenges remain. Input costs for steel, aluminum, and batteries remain volatile, and OEMs must continue investing in cleaner technologies to meet stricter emission standards. Moreover, rising financing costs and high interest rates could limit some of the benefits of lower GST. To maximize the impact, OEMs may need to combine tax savings with attractive financing schemes and flexible ownership models.
Summary. India’s planned GST reform, reducing taxes on small cars, two-wheelers, and insurance, could be a turning point for the auto industry. For OEMs, the move promises higher production volumes, renewed demand in the mass-market segment, smoother tax compliance, and stronger export competitiveness. While raw material inflation and regulatory challenges remain, the reform offers a rare chance to restore growth in entry-level vehicles, support job creation, and reinforce India’s position as a global automobile hub. PSR
Aditya Kondejkar is Research Analyst – South Asia Operations for Power Systems Researc
