The latest GST reforms (GST 2.0), announced by Finance Minister Nirmala Sitharaman, have brought some relief for the Indian automotive industry and car buyers. By cutting taxes and removing the compensation cess, owning your dream car has become a bit more affordable.
The new GST rates for cars will be effective from September 22, 2025.
No More Compensation Cess
Earlier, a compensation cess between 1% to 22% was added on top of GST depending on the car’s category, engine size, and drivetrain. This pushed effective tax rates up to 50% for some vehicles. With the new GST rules, this cess has been removed, bringing down total taxes across most car categories.
Simplified GST Table
| Vehicle Type | Engine/Length | Old Tax (GST + Cess) | New Tax | Savings | Examples |
|---|---|---|---|---|---|
| Small Petrol Cars | Up to 1200cc, sub-4m | 28% + 1% = 29% | 18% | 10–11% | Maruti Alto, Renault Kwid, Hyundai i20, Maruti Baleno, and petrol versions of most sub-4m SUVs. except Maruti Brezza |
| Small Diesel Cars | Up to 1500cc, sub-4m | 28% + 3% = 31% | 18% | 13% | Tata Nexon, Altroz, Kia Sonet, Hyundai Venue, Mahindra XUV 3XO |
| Mid/Large Hybrid Cars | Above 4m | 28% + 15% = 43% | 40% | ~3% | Grand Vitara Strong Hybrid, Toyota Hyryder, Honda City Hybrid |
| Mid-Size Cars | Up to 1500cc | 28% + 17% = 45% | 40% | 5% | Maruti Brezza, Ertiga, Hyundai Creta, Kia Seltos, Honda Elevate, Volkswagen Virtus, Skoda Slavia |
| SUVs | Exceeding 1500cc or a length exceeding 4000mm, and ground clearance of 170mm and above | 28% + 22% = 50% | 40% | 10% | Mahindra XUV700, Scorpio N, Tata Harrier, MG Hector, Toyota Fortuner |
| Electric Vehicles | Any | 5% | 5% | 0% | Tata Tiago EV, Nexon EV, MG ZS EV, Hyundai IONIQ 5 |
| Luxury Cars | High-end | 28% + 20–22% = 48–50% | 40% | 8–10% | Mercedes-Benz C-Class, BMW 5 Series |
Maruti Brezza – A Classic Case
The Maruti Suzuki Brezza measures under 4 meters; however, it has a 1500cc petrol engine, and so it attracts a higher GST of 40%. On the other hand, all its rivals, like Tata Nexon, Kia Sonet, and Hyundai Venue, now fall under the 18% category.
Takeaways
While GST 2.0 reduces effective taxes for most small cars, diesel SUVs, and mid-sized vehicles, the picture is nuanced:
- Small Car Buyers Win Big: Affordable hatchbacks and sub-compact SUVs get significant savings, making cars like the Maruti Alto, Baleno, Tata Altroz, and Hyundai i20 even more competitive.
- SUV Buyers Benefit: The removal of a 22% cess on large SUVs like the Mahindra XUV700 and Toyota Fortuner is a substantial win, though the base GST hike to 40% partially offsets this.
- Luxury & Hybrid Cars See Mixed Impact: Luxury and hybrid vehicles face a higher GST of 40%, but the removal of cess slightly softens the blow. Buyers of high-end hybrids will still see marginal relief.
- EV Market Stagnant: No change for electric vehicles. While 5% GST is low, the lack of additional incentives could slow EV adoption in India compared to cheaper fossil-fuel alternatives.
- Potential Market Shifts: The new GST regime may encourage more small petrol and diesel cars, as they now cost noticeably less, while buyers of bigger SUVs and luxury vehicles may see only modest savings.
Confusion Still Persists
Since the new GST rates take effect from 22 September, there’s still some confusion about how the existing car stock will be priced. Cars already at dealerships/stock yards could be sold at either the old or new rates, depending on dealer decisions. Many buyers may wait for the new rates to come into effect, leaving dealers to decide how to clear older stock, whether through discounts, absorbing the tax difference, or passing on the benefit to customers.
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