The Indian automotive industry is set for a significant shift as the government announces a major restructuring of the Goods and Services Tax (GST) for vehicles, effective September 22, 2025. While the move aims to simplify the tax structure and potentially boost demand, the Federation of Automobile Dealers Associations (FADA) has raised concerns about substantial financial implications for dealers.

Key Tax Changes

The new GST structure introduces several changes across various vehicle categories:

• Small Cars: GST reduced from 28% to 18% for:

  • Petrol, LPG, CNG vehicles up to 1200cc and 4000mm length
  • Diesel vehicles up to 1500cc and 4000mm length

• Two-Wheelers: Motorcycles up to 350cc will now attract 18% GST, down from 28%

• Commercial Vehicles: GST reduced to 18% from 28%

• Auto Parts: Tax rate lowered to 18% from 28%

• Tractors and Related Parts: GST reduced to 5% from the previous 12-18%

• Larger Vehicles: A flat 40% GST for:

  • Mid-size and large cars exceeding 1500cc or 4000mm
  • SUVs, MUVs, MPVs, XUVs with ground clearance over 170mm
  • Motorcycles above 350cc
  • Luxury vehicles

• Electric Vehicles: Remain unchanged at 5% GST

FADA's Concerns

While the tax restructuring aims to boost affordability and demand, FADA has highlighted a significant concern for auto dealers. The association estimates a potential loss of ₹2,500.00 crore due to unclear treatment of existing cess balances in dealers' books.

FADA President CS Vigneshwar emphasized the urgency of addressing this issue, stating, "We need clarity on how the existing cess balances will be treated before the festive season begins. This uncertainty could have a substantial financial impact on dealers across the country."

Impact and Expectations

The GST restructuring is expected to have far-reaching effects on the automotive sector:

1. Affordability: Reduced tax rates on smaller vehicles and two-wheelers could make them more accessible to a broader consumer base.

2. Demand Boost: Lower prices might stimulate demand, particularly in the small car and two-wheeler segments.

3. Simplified Structure: The new system aims to streamline the previously complex tax structure, potentially easing compliance for manufacturers and dealers.

4. Luxury Vehicle Market: The flat 40% GST on larger and luxury vehicles replaces the previous system of 28% GST plus 17-22% cess, which totaled 45-50%.

Industry Response

While FADA has welcomed the reforms for their potential to boost affordability and demand, the association remains cautious about the immediate financial implications for dealers. The ₹2,500.00 crore estimated cess loss underscores the need for clear guidelines on managing the transition.

As the automotive industry prepares for this significant shift, stakeholders are keenly awaiting further clarifications from the government, particularly regarding the treatment of existing cess balances. The coming months will be crucial for dealers and manufacturers as they adapt to the new tax regime and assess its impact on their operations and the broader market dynamics.

With the implementation date set for September 2025, the industry has time to prepare, but FADA's call for immediate clarity highlights the importance of proactive planning and communication between the government and automotive sector stakeholders.

The Goods and Services Tax (GST) Council has announced significant tax rate reductions for the automotive sector, set to take effect from September 22. This move is expected to make vehicles more affordable and potentially boost consumer spending in the industry.

Key Changes in GST Rates

• Small Cars: GST rates for small petrol and diesel cars have been reduced from 28% to 18%. This applies to vehicles not exceeding 1200cc (petrol) or 1500cc (diesel) engine capacity and 4000mm in length.

• Electric Vehicles: The existing 5% GST rate for electric vehicles remains unchanged, continuing to support the government's push for eco-friendly transportation.

• Motorcycles: Bikes with engine capacity up to 350cc will now be taxed at 18%, down from the previous 28%. However, motorcycles exceeding 350cc will face a higher GST rate of 40%.

• Commercial Vehicles: Buses, trucks, and ambulances will benefit from the reduction in GST rates from 28% to 18%.

• Auto Parts: All automobile parts will now have a uniform taxation rate of 18%.

Simplified GST Structure

The government has taken steps to simplify the GST structure by reducing the number of tax slabs from four to two (5% and 18%). This move aims to streamline the taxation process and potentially reduce compliance burdens for manufacturers and dealers.

Industry Impact

Industry experts suggest that these tax rate reductions will have a positive impact on the automotive sector:

1. Increased Affordability: The lower GST rates, especially for small cars and two-wheelers, are expected to make vehicles more affordable for consumers.

2. Boost in Consumer Spending: The reduced prices may stimulate consumer demand, potentially leading to increased sales in the automotive sector.

3. Uniform Parts Taxation: The standardization of GST rates for all automobile parts at 18% may simplify supply chain operations and pricing strategies for manufacturers.

Potential Challenges

While the GST rate cuts are generally seen as positive for the industry, there may be some challenges:

• State Incentive Programs: Existing state-level incentive programs for the automotive industry may require renegotiation, as many of these are linked to the previous GST rates.

• Revenue Impact: The reduction in tax rates may initially impact government revenue, although increased sales could potentially offset this in the long run.

Conclusion

The GST Council's decision to reduce tax rates for various segments of the automotive industry represents a significant move to stimulate growth in the sector. As these changes take effect, both consumers and industry stakeholders will be keenly watching how the market responds to the new tax structure.