India plans to reduce taxes on small cars and insurance premiums as part of a major overhaul of its goods and services tax (GST), a government source announced on Monday. This initiative from Prime Minister Narendra Modi has led to a surge in stock markets.
Over the weekend, Modi’s administration unveiled its most significant tax reform since 2017. Consumer, auto, and insurance companies are expected to benefit greatly as product prices are set to decline from October, upon approval of the reform.
The federal government has proposed reducing GST on small petrol and diesel cars from 28% to 18%, according to a source involved in the discussions. GST on health and life insurance premiums could also drop from 18% to as low as 5% or even zero, the source added. On Monday, Indian markets soared, with the Nifty index rising 1.3%, marking its best day in three months. Auto stocks also experienced a rally.
These tax reductions “will enhance affordability, boost consumption, and make essential and aspirational goods more accessible to a wider audience,” noted Mahesh Nandurkar, an equity analyst at Jefferies.
“Maruti (Suzuki) is likely to be the biggest beneficiary of this potential cut,” he added.
While Modi’s extensive tax cuts may challenge government revenues, they are receiving accolades from businesses and political analysts who believe these cuts will strengthen his stance in the ongoing trade tensions with Washington.
Federal officials stated that New Delhi has proposed only two tax rates—5% and 18%—under the new structure, eliminating the highest 28% bracket.
The proposal, however, introduces a 40% tax on 5-7 “sin-goods” like tobacco products and luxury items.
The changes will not be implemented until the GST Council, led by the federal finance minister and including representatives from all states, approves them. A meeting is anticipated by October.
India’s finance ministry did not respond to a request for comment.
SHARES SURGE
Sales of small cars, defined as those with petrol engines under 1200cc and diesel engines under 1500cc, and not exceeding 4 meters in length, have declined in recent years as buyers opt for larger, feature-rich SUVs.
Last fiscal year, small cars accounted for a third of the 4.3 million passenger vehicles sold in the world’s third-largest auto market, down from nearly 50% before COVID, according to industry data.
The tax cut represents a significant advantage for Maruti, whose market share has dropped to about 40% from over 50% in the past five years as sales of its small cars like Alto, Dzire, and Wagon-R decreased.
This segment constitutes half of Maruti’s total sales, with Maruti being majority-owned by Japan’s Suzuki Motor. Hyundai Motor India and Tata Motors are also poised to benefit.
Cars with larger engines, currently subject to a 28% GST and additional levies up to 22%—resulting in around 50% total taxes—may be classified under a new special rate of 40%, the source mentioned.
The government source indicated that discussions are ongoing to determine if any additional levies should be applied over the 40% to maintain the overall tax burden for large cars between 43% and 50%. Conversely, insurance penetration in India remains low at 3.8% of GDP as of 2024, according to Swiss Re Institute. Companies anticipate that reducing GST will help increase insurance product sales.
Shares of automakers like Maruti, Mahindra Mahindra, Hero MotoCorp, Bajaj Auto, and Eicher Motors rose 2%-8% in morning trading. Shares of insurance companies such as ICICI Prudential, SBI Life, and LIC increased by 2%-4%.
