India is considering reducing the Goods and Services Tax (GST) on small cars from 28% to 18%, as part of substantial consumption tax reforms, a government insider revealed on Monday.
This initiative, the most significant tax reduction since Prime Minister Narendra Modi’s 2017 announcement, aims to boost sales for major automakers like Maruti Suzuki.
According to a source directly involved, the government proposes a GST cut on small petrol and diesel cars to 18% from the current 28%.
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GST on health and life insurance premiums might also drop to 5% or even zero from the current 18%, the source indicated.
If approved, these tax cuts are expected to be declared by Diwali, a significant five-day Hindu festival in October, and India’s largest shopping period.
India’s finance ministry has not responded to requests for comments via email.
Sales of small cars, defined as those with an engine capacity below 1200cc for petrol and 1500cc for diesel and under four meters in length, have declined as consumers shift to larger, feature-rich SUVs.
Small cars accounted for a third of the 4.3 million passenger vehicles sold in India, the world’s third-largest auto market, last fiscal year, down from nearly 50% before the COVID-19 pandemic, according to industry data.
The tax cut would be a major boost for Maruti, whose market share has declined to about 40% from over 50% in the past five years due to reduced sales of models like Alto, Dzire, and Wagon-R. Small cars represent half of Maruti’s sales—mainly owned by Japan’s Suzuki Motor. Hyundai Motor India and Tata Motors would also benefit.
Higher-capacity cars, currently taxed at 28% GST with an additional levy up to 22%, totaling about 50%, might see a new special rate of 40%, the source noted.
Details are being finalized to determine if any extra charges should be added over 40% to maintain the overall tax for big cars between 43% and 50%, the source added.
The announcement caused a significant increase in automaker and insurance stocks.
Shares of automakers like Maruti, Mahindra Mahindra, Hero MotoCorp, Bajaj Auto, and Eicher Motors rose between 2% and 8% in early trading. Insurance companies such as ICICI Prudential, SBI Life, and LIC saw a rise of 2% to 4%.
The surge in auto, insurance, and consumer stocks contributed to the broader market’s over 1% increase.
India integrated local state taxes into the nationwide GST in 2017, but faced criticism for its complex four-tier structure of 5%, 12%, 18%, and 28% taxes.
Now, it suggests a major overhaul with a two-rate system of 5% and 18%. The GST Council, led by the federal finance minister and including representatives from all states, will decide on the rates by October for a nationwide implementation, the source stated.
