India’s GST regime is evolving with GST 2.0, announced on August 15, 2025, to simplify taxes and improve ease of doing business. The GoM has recommended a two-slab structure, with final approval expected at the 56th GST Council.

The automobile sector in India is facing a period of uncertainty amid speculations around GST 2.0. The proposed GST 2.0 framework could retain only 5% and 18%, with a potential new 40% slab for luxury and sin goods. If implemented, such changes could impact all vehicle categories: two-wheelers, passenger vehicles (PVs), three-wheelers, commercial vehicles (CVs), and electric vehicles (EVs). The industry has stressed that quick clarity on the final GST structure is critical for effective planning and decision-making.

Before analysing the impact of the new tax structure, it’s important to understand the composition of India’s vehicle market:

• Two-Wheelers: ~63% of total vehicle sales, with approximately 97–98% in the <350 cc segment and the remaining 2–3% in the >350 cc segment.
• Passenger Vehicles: ~15% of total sales, split between small cars and larger, premium cars.
• Commercial Vehicles: ~3–4% of total sales, spanning small light commercial vehicles to larger trucks.
• Three-Wheelers: ~2–3% of total sales, primarily used for last-mile connectivity and urban transport.
• Electric Vehicles (EVs): ~3% of the light vehicle market, with adoption concentrated in affordable models.

Current GST Slabs

Proposed GST 2.0 – Speculative View

While the GoM has recommended rationalisation to 5%, 18% and 40% slabs, the exact mapping of vehicles is not yet confirmed. Based on media reports and industry buzz:

• Small cars (<1200cc) and two-wheelers (<350cc) could move to the 18% slab, significantly reducing prices.
• Luxury cars, SUVs, and high-end bikes (>350cc) are expected to fall under the 40% bracket.
• Removal or reduction of compensation cess is under consideration, but not finalised.

Implications Across Vehicle Segments

The proposed GST restructuring will have varied implications across segments:

• Two-Wheelers: Sub-350 cc bikes benefit from lower GST, likely boosting sales among first-time buyers. Larger bikes (>350 cc) may see slower demand due to higher tax rates. Given that >350 cc bikes constitute a small portion of total two-wheeler sales, a single GST slab for all two-wheelers could simplify compliance, reduce market distortions, and provide uniform pricing incentives across the segment.
• Passenger Vehicles: Small cars may witness increased bookings due to more affordable pricing. Larger vehicles under the 40% slab could benefit if the compensation cess is removed, lowering the overall tax burden and potentially supporting sales rather than causing deferred purchases.
• Three-Wheelers & Commercial Vehicles: Smaller models become more accessible, encouraging fleet expansion, while larger vehicles could face cost pressures. Removal of any applicable cess could help moderate the price impact for higher-end models.
• EVs: Affordable EVs maintain their competitive edge, while premium models may see a marginal impact on pricing. Retaining lower GST rates for EVs ensures continued adoption and aligns with India’s sustainable mobility goals.

Overall Market Implications:

• Boost in affordability: Entry-level vehicles could see increased demand.
• Cost pressure on premium models: High-end vehicles may face deferred purchases or market shifts toward mid-range models.
• Simplified compliance: Fewer slabs reduce operational complexity for manufacturers and dealers.
• Input Tax Credit (ITC) Considerations: An Inverted Duty Structure (IDS) arises when the GST rate on the final product is lower than that on inputs. For example, if a vehicle is taxed at 18% while its components remain at 28%, businesses accumulate ITC exceeding GST on output. This creates a refund scenario, allowing companies to claim excess credit and maintain cash flow. Effectively, slab reductions on outputs without corresponding input adjustments make it essential for businesses to track eligible ITC and manage finances efficiently.

The proposed GST 2.0 reforms mark a significant shift for India’s auto industry, with potential to reshape pricing, demand and tax management across vehicle segments. While smaller vehicles and affordable EVs may benefit from lower rates, premium models and larger vehicles could face higher costs. Businesses that proactively assess these changes, optimize input tax credit management and leverage tools like IRISGST will be better positioned to navigate the transition, maintain competitiveness, and capitalize on opportunities in a rapidly evolving tax landscape.

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