The Indian automotive market may see a shift as the government considers tax reductions on small cars under new GST reforms. This could make entry-level vehicles more affordable, potentially reversing the recent trend of declining sales for these models. The proposal aims to adjust the Goods and Services Tax (GST) structure, specifically targeting small cars to stimulate demand.
The proposed reform involves placing small cars in an 18% tax bracket, a significant decrease from the current 28% GST plus a 1% cess. Small cars are defined as those with a length of up to 4 meters and engine capacity below 1200cc. Larger vehicles, including SUVs, will be taxed at a special rate of 40%. Electric vehicles will retain their existing 5% GST rate.
Prime Minister Narendra Modi highlighted the upcoming GST reforms during his Independence Day speech, emphasizing the goal of reducing the tax burden for citizens. The reform proposes a streamlined structure with two primary tax slabs: 5% and 18%, with the potential removal of the 12% and 28% tax rates. Some items may be subject to a special 40% tax.
Market analysts anticipate that these GST changes could translate into substantial price reductions for small cars, potentially making them more attractive to buyers. This price cut could benefit a wide range of vehicles, from hatchbacks to small SUVs, offering relief to those purchasing their first car. Declining sales of small cars have significantly impacted major manufacturers like Maruti Suzuki, Hyundai, and Tata Motors. The growing preference for SUVs and the rising cost of small cars have played a key role in this shift.
In the previous fiscal year, compact car and hatchback sales decreased while SUV sales experienced a notable increase. The market share of small cars has also declined over the last five years. Manufacturers of affordable vehicles such as Maruti Suzuki, Tata Motors, and Hyundai are likely to gain from these price reductions. The government’s move to potentially reduce taxes on small cars is a response to changing market dynamics, aiming to support the entry-level segment and stimulate overall vehicle sales.
The price cuts could affect various models including the Maruti Swift, FRONX, Dzire, Baleno, Wagon R, Ignis, alto K10, Eeco and Celerio, Hyundai i20, i10, Exter and Aura, and Tata Punch and Tiago.