GST Reform: What It Means for the Auto & EV Industry

The Government of India has announced a major restructuring of the Goods and Services Tax (GST), effective 22nd September 2025. This landmark decision simplifies the previous multi-slab structure into three clear categories:

• 5% GST – for essential goods and services

• 18% GST – the standard rate for most items, including automobiles and parts

• 40% GST – for super luxury goods such as high-end vehicles, premium imports, and luxury motorcycles

This change is expected to impact the automobile and electric vehicle (EV) sectors significantly.

Impact on the Auto Industry

Relief for Small Vehicles

Small cars with petrol engines up to 1,200 cc (≤ 4 metres in length), diesel cars up to 1,500 cc (≤ 4 metres), motorcycles up to 350 cc, three-wheelers, ambulances, and light commercial vehicles will now attract 18% GST.

Previously, these segments were taxed at 28% plus cess. This reduction will make entry-level vehicles more affordable, particularly important ahead of the festive season.

Standardisation for Auto Components

All auto parts and accessories are now uniformly taxed at 18%, replacing earlier variations. This is expected to simplify compliance and reduce costs for manufacturers and suppliers.

Higher Tax on Luxury and Premium Vehicles

Larger vehicles, cars longer than 4 metres, SUVs, motorcycles above 350 cc, and other premium models are now placed under the 40% GST slab.

While this is slightly lower than the earlier combined rate of GST plus cess, it maintains a high taxation environment for luxury consumption.

On-road prices of many premium vehicles may rise, putting pressure on demand in this segment.

Impact on the EV Industry

5% GST Retained

Electric vehicles will continue to enjoy the 5% concessional GST rate across all categories. This is a major win for the EV industry, ensuring affordability and supporting India’s clean mobility mission.

Balancing ICE and EV Competitiveness

While EVs remain at 5% GST, the reduction in tax on small petrol and diesel cars to 18% could make conventional vehicles more attractive in the short term. The industry will closely watch consumer behaviour during the upcoming festive season to see if this shift affects EV adoption.

Key Takeaways

• Affordable mobility: Small ICE vehicles and two-wheelers become cheaper.

• Simplified compliance: Auto parts and services aligned to 18% GST.

• Luxury hit: Super luxury cars and bikes face higher taxes under 40%.

• EV push intact: All electric vehicles remain at 5% GST, reinforcing the government’s green mobility agenda.

Conclusion

The new GST structure is a game-changer for India’s auto and EV industry.

By cutting rates for small vehicles and retaining incentives for EVs, the government aims to strike a balance between affordability, industry growth, and sustainability.

However, luxury automakers will face challenges, while mass-market players and EV manufacturers are set to benefit from improved demand and simplified taxation.