Why Are Automobiles in India Becoming Cheaper After the GST Rates Change?

September 26, 2025 Posted by India Briefing Written by Melissa Cyrill Reading Time: 7 minutes

GST 2.0 has set in motion an unusual shift in India’s auto market, with prices dropping across everything from entry-level hatchbacks to premium SUVs. By removing the cess and simplifying tax slabs, the reform has eased the overall tax load, making cars more affordable and driving up demand.

The Indian automobile market is experiencing a rare phenomenon: prices across a wide spectrum of vehicles—from entry-level hatchbacks to luxury SUVs—are falling. This development comes in the wake of sweeping changes to India’s Goods and Services Tax (GST) structure, a reform that aims to simplify indirect taxation while stimulating demand.

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At first glance, the headline numbers appear counterintuitive: small cars have been shifted into a lower 18 percent GST bracket, but luxury cars and SUVs face a steep 40 percent GST rate. However, the removal of the additional cess on vehicles has changed the arithmetic significantly, leaving many buyers pleasantly surprised. The price tags on showrooms across India are, in many cases, lighter than before.

What changed in the GST structure

The central government’s GST 2.0 reform, effective September 22, 2025, has collapsed India’s earlier four-slab structure (5 percent, 12 percent, 18 percent, 28 percent) into a simpler framework:

Standard rates: 5 percent and 18 percent [Note: A 3 percent GST rate continues to apply only to gold and silver.]
De-merit rate: 40 percent for luxury, sin, or environmentally unfriendly goods

Impact on automobiles

Small cars: Petrol vehicles with engine capacity ≤ 1,200 cc and length ≤ 4 meters, or diesel vehicles ≤ 1,500 cc, now fall under the 18 percent GST slab (down from 28 percent).
Commercial vehicles: GST rationalization brings buses, trucks, and ambulances under a uniform 18 percent slab, down from the earlier 28 percent. Likewise, three-wheelers, a critical mode of mobility in both urban and rural India, will also fall under the streamlined 18 percent rate, ensuring parity across vehicle categories.
Luxury vehicles and larger SUVs: These are moved into the 40 percent slab. On paper, this looks like a hike from the earlier 28 percent, but under the old system, these cars attracted not only 28 percent GST but also an additional compensation cess of 17–22 percent, bringing the effective tax burden to nearly 50 percent. By eliminating the cess, the new system simplifies compliance while lowering the net tax on premium vehicles.
Note: The reform also simplifies the treatment of auto components, which will now all be taxed at 18 percent regardless of their HS code classification—a move expected to ease compliance for manufacturers and suppliers.

CLICK HERE TO KNOW MORE: India’s GST Overhaul: What Goods Become Cheaper and What Gets Costlier

Why automobile prices are falling

Abolition of the cess

Previously, the cess acted as a double layer of taxation, significantly inflating prices. For example, a luxury sedan costing INR 5 million (US$56,757.8) ex-factory could end up closer to INR 7.5 million (US$85,136.8) after taxes and cess. Now, even with the higher 40 percent GST rate, the absence of cess means the total payable tax is lower.

Car makers passing benefits to consumers

Manufacturers and dealers are keen to boost sales volumes ahead of the festive season. Several car brands—including Hyundai, Mahindra, Toyota, and luxury players like Mercedes-Benz and BMW—have already announced significant price cuts, passing on most of the tax savings directly to customers.

Mid-segment cars also gain

For compact SUVs, sedans, and mid-sized hatchbacks, the drop from 28 percent to 18 percent GST is straightforward. This segment, which accounts for the bulk of India’s passenger vehicle sales, is seeing ex-showroom prices come down by tens of thousands of rupees, improving affordability for middle-class buyers.

Demand-side economics

Lower prices tend to stimulate demand. Automakers expect higher sales volumes, which in turn allows them to optimize production lines and reduce per-unit costs. This cycle reinforces price competitiveness in the medium term.

Car sales in India surge amid GST 2.0 reforms and festive season

India’s automobile market witnessed a sharp spike in demand as the festive season coincided with the rollout of GST 2.0 reforms. The revised tax structure lowered the GST on sub-4 metre cars from 28 percent to 18 percent and scrapped the compensation cess, making petrol, hybrid, LPG, CNG, and diesel variants within specified engine and size limits more affordable for buyers.

On September 22, 2025, Tata Motors recorded sales of nearly 10,000 passenger vehicles, supported by over 25,000 customer enquiries at its dealerships nationwide. Maruti Suzuki, meanwhile, achieved its best single-day performance in 35 years, delivering close to 30,000 vehicles after receiving more than 80,000 enquiries. Bookings for its small-car segment rose by 50 percent compared to typical festive trends, with dealerships extending hours to accommodate customer demand.

Hyundai Motor India also posted its strongest single-day sales in five years, with around 11,000 dealer billings, reflecting the combined boost of festive sentiment and reduced vehicle prices under GST 2.0.

How much cheaper are cars in India now?

The real impact is visible in the price lists released post-GST change:

Automobile Cost Comparison under GST 1.0 and GST 2.0
Car brand	Variant/model	Price under GST 1.0	Price under GST 2.0	Price reduction
Tata Motors	Nexon	INR 1 million-1.56 million	INR 845,000-1.40 million	INR 155,000
	Safari	INR 1.5 million-2.2 million	INR 1.35 million-2.05 million	INR 145,000
	Harrier	INR 1.4 million-2 million	INR 1.26 million-1.86 million	INR 140,000
	Punch	INR 600,000-800,000	INR 515,000-715,000	INR 85,000
	Curvv	INR 900,000-1.40 million	INR 835,000-1.33 million	INR 65,000
	Tiago	INR 500,000-600,000	INR 425,000-525,000	INR 75,000
	Tigor	INR 600,000-700,000	INR 520,000-620,000	INR 80,000
	Altroz	INR 700,000-900,000	INR 590,000-790,000	INR 110,000
Mahindra & Mahindra	Bolero/Neo	INR 800,000-900,000	INR 673,000-773,000	INR 127,000
	XUV3XO Petrol	INR 800,000-1.58 million	INR 660,000-1.44 million	INR 140,000
	XUV3XO Diesel	INR 999,000-1.47 million	INR 843,000-1.31 million	INR 156,000
	Thar 2WD	INR 1.15 million-1.76 million	INR 1.01 million-1.62 million	INR 135,000
	Thar 4WD	INR 1.30 million-1.90 million	INR 1.19 million-1.79 million	INR 101,000
	Scorpio Classic	INR 1.1 million-1.5 million	INR 999,000-1.39 million	INR 101,000
	Scorpio-N	INR 1.4 million-2.1 million	INR 1.25 million-1.95 million	INR 145,000
	Thar Roxx	INR 900,000-1.2 million	INR 767,000-1.06 million	INR 133,000
	XUV700	INR 1.5 million-2.2 million	INR 1.35 million-2.05 million	INR 143,000
Maruti Suzuki	S-Presso	INR 427,000-612,000	INR 350,000-512,000	INR 129,000
	Alto K10	INR 500,000-600,000	INR 392,000-492,000	INR 108,000
	Swift	INR 700,000-800,000	INR 615,000-715,000	INR 85,000
	Dzire	INR 800,000-900,000	INR 712,000-812,000	INR 88,000
	Brezza	INR 900,000-1.1 million	INR 787,000-987,000	INR 112,000
	Fronx	INR 800,000-1 million	INR 688,000-888,000	INR 112,000
	Grand Vitara	INR 1 million-1.2 million	INR 893,000-1.09 million	INR 107,000
	Ertiga	INR 800,000-1 million	INR 754,000-954,000	INR 46,000
Toyota	Fortuner	INR 3.5 million-4.5 million	INR 3.15 million-4.15 million	INR 349,000
	Legender	INR 4 million-5 million	INR 3.66 million-4.66 million	INR 334,000
	Hyryder	INR 1.5 million-1.8 million	INR 1.39 million-1.69 million	INR 110,000
	Hilux	INR 2 million-2.5 million	INR 1.74 million-2.24 million	INR 252,000
	Vellfire	INR 9 million-10 million	INR 8.72 million-9.7 million	INR 278,000
	Camry	INR 4.5 million-5.5 million	INR 4.39 million-5.39 million	INR 101,000
	Innova Crysta	INR 2 million-2.5 million	INR 1.82 million-2.32 million	INR 180,000
	Innova Hycross	INR 2.2 million-2.8 million	INR 2.08 million-2.68 million	INR 115,000
	Other models			Up to INR 111,000 off
Hyundai	Venue	INR 794,000-1.38 million	INR 726,000-1.26 million	INR 124,000
	Venue N-Line	INR 800,000-1.4 million	INR 681,000-1.28 million	INR 119,000
	Creta	INR 1 million-1.4 million	INR 928,000-1.32 million	INR 72,000
	Creta N Line	INR 1 million-1.4 million	INR 929,000-1.32 million	INR 71,000
	Alcazar	INR 1.5 million-2 million	INR 1.42 million-1.92 million	INR 75,000
	Tucson	INR 2.2 million-2.8 million	INR 1.96 million-2.56 million	INR 240,000
Honda	Amaze	INR 700,000-900,000	INR 600,000-800,000	INR 100,000
	Elevate	INR 1 million-1.5 million	INR 942,000-1.44 million	INR 58,000
	City	INR 1.20 million-1.6 million	INR 1.14 million-1.54 million	INR 57,000
MG Motor	Astor	INR 1 million-1.5 million	INR 946,000-1.44 million	INR 54,000
	Hector	INR 1.5 million-2 million	INR 1.35 million-1.85 million	INR 149,000
	Gloster	INR 3 million-3.5 million	INR 2.69 million-3.19 million	INR 304,000
Kia	Seltos	INR 1 million-1.5 million	INR 925,000-1.42 million	INR 75,000
	Sonet	INR 800,000-1.20 million	INR 636,000-1.03 million	INR 164,000
	Syros	INR 950,000-1.67 million	INR 799,000-1.49 million	INR 186,000
	Carens	INR 1 million-1.5 million	INR 952,000-1.45 million	INR 48,000
	Carens Clavis	INR 1.10 million-1.6 million	INR 1.02-1.52 million	INR 78,000
	Carnival	INR 3 million-3.5 million	INR 2.55 million-3.05 million	INR 448,000
Skoda	Kodiaq	INR 3.5 million-4.5 million	INR 3.17 million-4.17 million	INR 330,000
	Kushaq	INR 1 million-1.5 million	INR 934,000-1.43 million	INR 66,000
	Kodiaq	INR 3.5 million-4.5 million	INR 3.17 million-4.17 million	INR 330,000

Sources: Autocar India, Kia Motors, Economic Times

Who benefits most?

Small car buyers

First-time buyers and budget-conscious families stand to gain the most, as small cars have shifted from a punitive 28 percent GST rate down to 18 percent. Car models such as the Maruti Suzuki Swift, Hyundai i10, and Tata Tiago are now significantly cheaper, widening access to mobility.

Luxury car buyers

Paradoxically, the biggest cheer is also coming from the luxury segment. Cars previously weighed down by a combined 50 percent tax burden are now cheaper by several hundred thousand Indian rupees, encouraging aspirational buyers and corporate fleets to reconsider purchases.

Automobile companies

With reduced sticker prices, manufacturers expect stronger demand. This is especially important at a time when India’s auto sector is navigating slowing exports, rising raw material costs, and a shift to electric mobility. The GST relief provides breathing space to ramp up production and sales.

Strategic rationale behind the reform

The government’s decision is not just about simplifying tax codes. It aligns with several broader economic objectives:

Boosting consumption: Cheaper vehicles encourage spending in a sector that has strong backward linkages with steel, rubber, glass, and electronics.
Supporting manufacturing: Lower domestic prices can strengthen India’s competitiveness against imported vehicles.
Inflation management: Automobiles are a key item in consumer inflation baskets. Reducing prices helps contain headline inflation.
Encouraging compliance: A single, transparent GST rate without cess reduces evasion and improves collection efficiency.
Electric Vehicles (EVs): The government has chosen not to revise the GST rate for EVs, which continue to enjoy a concessional levy of just 5 percent. While this means their relative tax advantage over petrol and diesel vehicles narrows slightly under the new regime, the decision provides stability and predictability for automakers and consumers alike.

Caveats and challenges

While the headline is positive, not all segments or consumers will feel the full benefit.

Incomplete pass-through: Some manufacturers may retain part of the tax savings to shore up margins.
Imported luxury cars: Customs duties and shipping costs remain unchanged, meaning ultra-luxury imports may not become dramatically cheaper.
State revenues: With the cess eliminated, states may worry about reduced compensation flows, sparking debates in the GST Council about revenue sharing.

Market and industry outlook

Industry analysts believe the GST shift will:

Increase festive season sales volumes by 10–15 percent in Q4 (October-December) of 2025.
Encourage global automakers to expand assembly operations in India, leveraging scale.
Push mid-range models as the biggest winners, since they appeal to both urban families and tier-2 city buyers.

For luxury brands, India could become a more attractive market, helping them compete with Southeast Asian peers where duties are lower.

Consumer sentiment

Social media chatter and dealership surveys suggest a surge in inquiries since the GST announcement. Many buyers who had postponed purchases citing high prices are now returning to showrooms. The psychological effect of a “government-driven discount” is also boosting sentiment.

Conclusion

The GST reform of September 2025 is a classic example of how structural tax changes can ripple through industries in unexpected ways. By abolishing cess and streamlining rates, the government has not only simplified compliance but also unlocked immediate consumer benefits.

Automobile prices across segments are falling—sometimes marginally, sometimes dramatically—reshaping affordability for India’s expanding middle class and aspirational consumers. While challenges around state revenues, import duties, and full pass-through remain, the broader message is clear: cars in India are getting cheaper, demand is likely to rise, and the auto sector is set to rev its engines once again.

(US$1 = INR 88.09)

(This article was originally published on September 16, 2025. It was updated on September 26, 2025.)

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Why Are Automobiles in India Becoming Cheaper After the GST Rates Change?