In a significant policy shift aimed at supporting the middle class and revitalising the automobile sector, the central government has proposed a reduction in Goods and Services Tax (GST) on entry-level vehicles, including two-wheelers and small cars.
The proposal follows Prime Minister Narendra Modi’s Independence Day announcement of a “Next Generation GST,” which envisions a streamlined tax structure. As part of this reform, the government is considering replacing the current four-tier GST system with a simplified two-rate structure of 5 per cent and 18 per cent across all goods.
Currently, passenger vehicles are taxed at 28 per cent GST, in addition to a compensation cess ranging from 1 per cent to 22 per cent depending on factors like engine size and body type.
Under the proposed reform, the 28 per cent slab would be lowered to 18 per cent, potentially eliminating the compensation cess for many entry-level vehicles.
The move could significantly reduce the cost of mass-market vehicles such as hatchbacks, compact SUVs, commuter motorcycles, and scooters—segments that account for the majority of vehicle sales in India.
A reduction in GST for two-wheelers, which remain the primary mode of daily transportation for millions of Indians, is expected to make them more affordable and drive up demand. The government hopes the tax cut will serve as a catalyst for growth in the auto industry while providing relief to consumers amid rising living costs.
