The September 2025 GST Council meeting introduced sweeping tax revisions that significantly lower GST rates across multiple vehicle and farm equipment categories. Tractors and their components now attract a 5% rate (from 12% for standard tractors, and from 18% for parts), while small cars, two-wheelers (up to 350cc), three-wheelers, buses, and certain commercial vehicles are enjoying reduced GST from 28% to 18%.
These changes are expected to improve affordability, stimulate demand (especially in rural and semi-urban areas), boost manufacturing and ancillary industries, and lead to job growth across the value chain.
Source: The Times of India. Read The Link
PSR Impact Analysis: The GST changes are expected to lead to significant changes in the auto and tractor segments, including:
- Improved Affordability for Farmers & Rural Buyers. The tractor GST cut from 12% to 5% could reduce retail prices by US$ 450-680 (₹40,000–₹60,000). This will make mechanization more accessible to small farmers, enhancing productivity and lowering labor dependence.
- Revival of Entry-Level Auto Segments. Small cars, two-wheelers (≤ 350cc), and three-wheelers shifting from 28% to 18% GST brings relief for middle-class buyers and rural commuters. This could revive first-time buying and expand penetration in Tier-2 and Tier-3 markets.
- Benefits to Ancillary & MSME Suppliers. A uniform 18% GST rate on most auto parts removes classification disputes, simplifies compliance, and reduces input costs for downstream suppliers, many of whom are MSMEs.
- Boost to Domestic Manufacturing & Exports. Lower costs and simpler tax structures improve India’s global competitiveness in both tractors and auto components, supporting the “Make in India” push and helping exports.
- Challenges & Trade-offs. Premium vehicles (large cars, SUVs) remain taxed at 40%, creating margin pressure. Risks also remain from possible inverted duty structures and external factors like high fuel prices or credit availability, which may temper the pace of demand revival.
Summary: The GST reduction is poised to deliver three key benefits:
- Demand stimulus across tractors and entry-level autos by making them more affordable.
- Rural empowerment, as farmers gain easier access to mechanization.
- Industry-wide gains for MSMEs, suppliers, and exporters through cost rationalization.
At the same time, impacts to watch include margin compression for premium vehicle makers, uneven benefits if cost savings aren’t passed to consumers, and possible strain on supply chains if demand surges.
On balance, the reforms are expected to be strongly positive for growth in both the automobile and tractor sectors, with rural India emerging as the biggest beneficiary. PSR
Aditya Kondejkar is Research Analyst – South Asia Operations for Power Systems Research
