India is considering a major tax reform ahead of Diwali—proposing to lower the GST on small cars and two-wheelers from the existing 28% to 18%. This initiative is part of a broader move to simplify the taxation structure and revitalize demand in key sectors.
What’s Being Proposed?
As part of a sweeping consumer tax overhaul, the government is contemplating scrapping the 12% and 28% GST slabs and adopting a simplified two-rate structure: 5% and 18%, while “sin goods” may remain taxed at a higher 40% rate. Under this scheme, small petrol and diesel cars—typically those under 4 meters and below 1,200 cc—would see a reduction in GST from 28% to 18%.
Market Reaction
The announcement triggered a market rally. On August 18, 2025, auto and consumer stocks surged—Maruti Suzuki shares rose 8%, and Hyundai Motor India rose 9%, while the auto index climbed nearly 5%, reaching a 10-month high. FMCG companies like Hindustan Unilever, Nestle India, and Dabur also gained as reductions in GST on everyday items sparked optimism.
Broader GST Overhaul
This proposed reform aligns with a larger effort to reshape India’s GST system, consolidating the current four slabs (5%, 12%, 18%, 28%) into just two: 5% and 18%, with select luxury items taxed at 40%. The intention is to streamline classification issues, reduce ambiguity, and make goods more affordable for common citizens.
Industry Benefits
- Automakers: Maruti Suzuki, Tata Motors, and Hyundai could reap significant gains as lower prices attract budget-conscious buyers to small cars.
- Consumers: The GST cut would directly reduce entry-level car and bike prices, especially appealing to middle-class households during the festive shopping surge.
Timeline & Decision Process
The final decision will rest with the GST Council, which includes the Finance Minister and representatives from states. Government sources indicate that the proposal could be finalized and announced around Diwali 2025—a major festive period known for high consumer spending.
Why It Matters
| Impact | Description |
|---|---|
| Boost to consumption | Lower taxes may revitalize demand for entry-level vehicles at a time when many buyers have shifted to SUVs. |
| Simplified taxation | A two-rate GST system reduces complexity and disputes over vehicle categorization. |
| Economic stimulus | The GST cut is a strategic move to support domestic industries and ease inflationary pressures. |
| Festive bump | Timing ahead of Diwali could amplify spending and spur short-term economic growth. |
External Authority Sources
- Reuters: Coverage of proposed GST rate cuts on small cars and insurance premiums Reuters
- Times of India & News outlets: GST simplification and its likely impact on auto and two-wheeler affordability
