Updates to Automobile Taxation in India: A GST 2.0 Overview

The 56th Goods and Services Tax Council meeting ushered in significant changes, dubbed "GST 2.0," effective from September 22, 2025. This reform will immediately affect individuals involved in the automobile sector, including buyers, dealers, and manufacturers. Key outcomes include reduced costs for smaller vehicles, streamlined compliance procedures, and a clearer, unified tax structure for luxury automobiles.

Key Modifications:

• Small cars now face an 18% tax rate, a decrease from the previous 28% plus cess, making entry-level vehicles more affordable. Conversely, luxury cars and SUVs are subject to a flat 40% rate, replacing the earlier 28% plus 15-22% cess, which simplifies premium vehicle pricing.
• Motorcycles up to 350cc see their tax drop from 28% to 18%, lowering the cost of commuter bikes. However, bikes exceeding 350cc experience a hike from 28% to 40%, making premium superbikes more expensive.
• Tractors benefit from a substantial reduction, moving from 12% to just 5%, which lessens ownership expenses for farmers and aims to stimulate rural demand.
• Commercial and special vehicles, such as buses, trucks, ambulances, fire engines, and cranes, now incur an 18% tax, down from 28%. This change is expected to decrease fleet and service operational costs.
• Electric vehicles (EVs) maintain their preferential 5% rate, continuing to strongly encourage EV adoption.
• Yachts and private aircraft will see their taxation increase from 28% to 40%, significantly raising the tax burden on these high-value luxury assets.

Understanding Automobile GST

GST 2.0 represents a simplified approach to vehicle taxation. Previously, the industry navigated various GST rates along with additional cesses on high-end vehicles, often leading to confusion for both consumers and tax practitioners. Under the new GST 2.0 framework:

• The taxation system primarily uses two major tax brackets: 18% and 40%.
• The compensation cess has been eliminated, providing considerable relief for manufacturers of luxury cars.
• Compliance procedures are becoming less complicated and more straightforward.

Revised GST Rates for Vehicles

The following table outlines the tax rates before and after GST 2.0, along with their impact on vehicle prices:

*Rates include both GST and cess components.

GST's Impact Across the Automotive Sector

The GST Council’s announcements do more than just alter figures; they redefine the market landscape. Here’s how various vehicle segments are influenced:

Small and Mid-Sized Vehicles

This category benefits most from GST 2.0, targeting the general populace. Cars previously subjected to a high 28% tax bracket now fall under 18%. This direct tax cut means more affordable hatchbacks and sedans. Consumers can anticipate more attractive offers during festive seasons, potentially accelerating car upgrades for middle-class families.

Motorcycles

The impact varies by engine capacity:

• Up to 350cc: Taxes decrease to 18%, resulting in lower prices for popular mass-market motorcycles. This makes models like the Royal Enfield Classic 350 or entry-level sports bikes more budget-friendly.
• Above 350cc: The situation reverses. Premium superbikes and cruisers now move into the 40% tax slab, a significant increase from the previous 28%.This policy clearly indicates that basic personal transport remains affordable, while high-end recreational vehicles incur additional costs.

Agricultural Tractors

Farmers stand to gain considerably. Tractors now face only a 5% GST rate, a reduction from earlier, higher slabs. Cheaper tractors lead to reduced ownership costs, easing financial pressure on agricultural incomes, and consequently, supporting more cost-effective food production and logistics. This move strongly supports the rural economy.

High-End Automobiles and SUVs

Previously, these vehicles carried a 28% GST along with a cess ranging from 15% to 22%. With GST 2.0, this additional cess is removed, and all taxes are integrated into a straightforward 40% slab. While the effective rate might see a minor decrease, the primary benefit is enhanced pricing clarity. Dealerships no longer need to explain complex cess calculations, and high-net-worth buyers benefit from more predictable pricing.

Commercial Transportation Vehicles

Buses, trucks, auto-rickshaws, ambulances, and cranes are now uniformly taxed at 18% GST. This is a significant advantage for India’s logistics, transport, and infrastructure sectors. Consistent, simpler rates facilitate smoother input tax credit claims and allow operators to achieve leaner cost margins, boosting efficiency across supply chains.

Electric Vehicles

The government maintains its commitment to green initiatives. Electric vehicles continue to enjoy a concessional 5% GST rate, ensuring continued acceleration of electric adoption. With decreasing costs and ongoing incentives, EVs are set to become mainstream more rapidly.

Broader Economic Implications

GST 2.0 signifies more than just a typical Council announcement; it represents a fundamental strategic realignment. By reducing rates for mass-market vehicles, rationalizing taxes for luxury cars, and sustaining incentives for EVs, the government signals the automobile sector's crucial role in India's consumption growth and environmental objectives. For consumers, this translates to more transparent pricing. For manufacturers, it means streamlined compliance. For the overall market, it generates renewed momentum.

Comprehensive GST Rates on Vehicles with HSN Codes

The following table provides a detailed overview of the old and new GST rates for various vehicle types, including their Harmonized System of Nomenclature (HSN) codes: