The Goods and Services Tax (GST) Council's move to implement a two-rate regime of 5% and 18%, from September 22, 2025, is likely to provide a major stimulus to car demand.
Two-wheelers and passenger cars (PVs), which account for 90% of the domestic automotive industry's volume, are likely to witness demand increasing by around 200 basis points (bps) and 100 bps, respectively.
Thus, sales of two-wheelers are expected to increase 5–6% during this fiscal, while sales of PVs could go up by 2–3%.
Two-wheeler sales had been easing in the initial quarter, especially for mass-market commuter models, as a result of regulatory hiccup through adoption of On-Board Diagnostics II (OBD2) and premature, intense onset of the southwest monsoon, which disrupted rural activity briefly and softened demand.
PV and small car sales also slowed down during June to August 2025 as a result of affordability issues, rare-earth minerals shortages, and consumers delaying purchases hoping for the GST rate reductions.
Besides stimulating demand, the reduced GST slabs are likely to simplify compliance and cut logistics costs by reducing complexity in interstate taxation, favoring profitability in the entire value chain.
Says Anuj Sethi, Senior Director, Crisil Ratings, "With GST reduction fully transmitted, car prices are likely to decrease 5-10% (Rs 30,000–60,000 on small PVs; Rs 3,000–7,000 on two-wheelers). With the rate reduction falling during Navratri and the festive season, sentiment would get an apt boost. Added to new models, more favorable interest rates and better affordability, this should augur a better second half for the auto industry."
Under the revised GST framework, rates on small PVs, two-wheelers up to 350 cc (nearly 90% of segment sales), commercial vehicles (CVs), and three-wheelers will decrease to 18% from 28%.
Mid- and larger PVs will also see a reduction of 3–7%, while tractors will benefit from cuts to 5% and 18% from the earlier 12% and 28%, respectively.
For CVs, the reduced GST will offset the increased cost of the mandatory AC cabin requirement from October 1, 2025.
Conversely, two-wheelers over 350 cc will have a greater levy of 40%, as against 31% (plus compensation cess) now, and will thus be pricier.
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