GST Reforms on Cars 2025: Small Vehicles May See Lower Tax, Luxury Segment to Stay Costly

Updated: Aug 30

GST Reforms on Cars 2025: The Indian government is preparing a major overhaul of the Goods and Services Tax (GST) regime that could make small cars cheaper for buyers. As per official sources, small cars such as hatchbacks, compact sedans, and mini-SUVs may soon fall under a reduced GST rate of 18%, compared to the current 28% plus a cess of 1–3%.

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GST Reforms on Cars 2025: Why is the Government Cutting GST on Small Cars?

The reform aims to differentiate mass-market vehicles from luxury vehicles. Smaller cars are considered essential for middle-class mobility, not a luxury. Reducing GST on these vehicles is expected to:

Boost demand in the affordable car segment
Make cars more accessible for first-time buyers
Support the auto industry’s recovery post-slowdown

What Happens to Luxury Cars and SUVs?

While small cars may become cheaper, luxury cars and large SUVs are likely to stay costly. After the removal of the 28% slab, these high-end vehicles are expected to be placed under a special 40% GST rate, keeping them in the “luxury/de-merit goods” category.

Current GST Rates on Two-Wheelers

At present, motorcycles with engine capacity above 350 cc attract 28% GST plus a 3% cess, bringing the effective tax rate to 31%. No major cuts are expected in this segment under the proposed reforms.

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Industry Impact of GST Reforms on Cars

Boost in small car sales due to lower purchase price
Stronger revenue balance by retaining higher GST on luxury items
Potential growth in auto financing and related services

These changes will be discussed in the upcoming Group of Ministers (GoM) meeting on GST reforms, before being presented to the Finance Ministry.

FAQs (Answer Engine Optimized)

Q1: What is the proposed GST rate for small cars in India 2025? The GST on small cars may be reduced to 18% from the existing 28% plus cess.

Q2: Will luxury cars get cheaper under GST reforms? No. Luxury cars and SUVs are expected to remain in the 40% special GST category.

Q3: What is the GST rate on bikes above 350 cc? Currently, bikes above 350 cc attract 28% GST + 3% cess = 31% total tax.

Q4: How do GST reforms affect car buyers? Small cars may become more affordable, while luxury and premium vehicles will continue to attract higher taxes.

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