New GST rates effective from 22 September 2025 promise cheaper cars, bikes, and commercial vehicles, boosting affordability
The Indian government’s recent GST reform, announced on 4 September 2025, has sent ripples of excitement through the automotive sector. Effective from 22 September 2025, this overhaul simplifies the tax structure for vehicles, slashing rates for small cars, motorcycles, and commercial vehicles while slightly increasing taxes for premium models. For travellers, this means more affordable personal and commercial mobility, especially during the festive season.
A Game-Changer for Budget Buyers
The GST reform introduces a streamlined three-tier tax structure of 5%, 18%, and 40%, replacing the earlier complex system of 28% GST plus a compensation cess of up to 22%. Small cars with petrol engines up to 1200cc or diesel engines up to 1500cc, and under 4 metres in length, now attract an 18% GST rate.
This applies to popular models like the Maruti Swift, Tata Punch, and Hyundai i20. Similarly, motorcycles up to 350cc, such as the Hero Splendor and Royal Enfield Classic 350, also fall under the 18% slab.
This reduction translates to significant savings. For instance, a small car previously taxed at 31% could see a price drop of up to 8.5%. A motorcycle buyer might save around 7.8% on a commuter bike. For travellers, this means lower costs for personal vehicles, making road trips and daily commutes more affordable.
The timing, just before Navaratri and Diwali, is strategic, encouraging festive season purchases and boosting demand in price-sensitive markets.
Boost for Commercial and Rural Mobility
Commercial vehicles, including three-wheelers, buses, and trucks, now face an 18% GST rate, down from 28%. This reduction could save buyers up to Rs 2 lakh on midsized trucks, easing costs for logistics and public transport operators.
For rural travellers, the reform extends benefits to tractors and farm machinery, also taxed at 18%. Lower acquisition costs for these vehicles enhance rural connectivity and mechanisation, supporting farmers and small businesses.
The GST reform also maintains the 5% rate for electric vehicles (EVs), reinforcing India’s push for green mobility. Commercial EV adoption, such as electric taxis and delivery vehicles, benefits from this low rate, potentially reducing fares for travellers using these services.
The logistics sector sees additional relief with GST on multimodal logistics and third-party insurance for goods carriers dropping to 5%. These changes promise cheaper travel and goods transport, impacting everyday commuters and businesses alike.
Triggers Behind the GST Overhaul
Several factors prompted the GST reform. The Indian automotive industry has faced sluggish demand in recent years, particularly in the entry-level segment. Small car sales have declined due to rising prices and a shift towards premium vehicles.
The government, led by Finance Minister Nirmala Sitharaman, aimed to revive mass-market demand through this reform. The Prime Minister’s Independence Day speech on 15 August 2025 highlighted the need for a simpler tax structure to empower the middle class and MSMEs, aligning with the Atmanirbhar Bharat vision.
Additionally, the impending end of the compensation cess by March 2026 necessitated a restructuring to maintain fiscal balance. The earlier tax system, with its layered GST and cess, created pricing confusion and burdened manufacturers. By eliminating the cess and introducing clear slabs, the reform simplifies compliance and encourages domestic manufacturing.
Industry leaders like Rajesh Jejurikar of Mahindra & Mahindra have praised the move, citing its potential to stimulate demand and drive inclusive growth.
Historical Context of Vehicle Taxation
Before the GST regime began in July 2017, vehicle buyers faced a complex web of excise duties, VAT, and octroi, with combined tax rates ranging from 26.5% to 44%. Small cars were relatively affordable, but SUVs and luxury vehicles bore heavy levies.
The introduction of GST streamlined taxes to a base rate of 28% plus a cess of 1–22%, depending on engine size and vehicle type. While this reduced the overall tax burden for most vehicles, luxury cars and high-capacity motorcycles still faced rates nearing 50%.
Over the years, the GST Council has tweaked rates to promote affordability and sustainability. For example, EVs saw their GST slashed from 18% to 5% in 2019 to boost green mobility. However, the compensation cess, introduced to offset revenue losses for states, complicated pricing.
The 2025 GST reform marks a significant shift by eliminating the cess and rationalising rates, making vehicles more accessible while maintaining revenue stability.
Implications for Travellers and the Industry
The GST reform reshapes the automotive landscape for travellers and manufacturers. For budget-conscious buyers, lower prices on small cars and commuter bikes mean easier access to personal mobility. Families planning road trips or daily commuters can now afford reliable vehicles without stretching their budgets.
Commercial vehicle operators benefit from reduced costs, potentially lowering freight and public transport prices, which could translate to cheaper travel options.
However, premium vehicle buyers face a mixed bag. Midsize and large cars, including SUVs like the Hyundai Creta and Toyota Fortuner, now fall under the 40% GST slab, as do motorcycles above 350cc, like the Royal Enfield 650 Twins.
While this rate is lower than the previous 45–50% (including cess), some high-capacity bikes may see price hikes of around 6.9%. Buyers of luxury vehicles, such as Mercedes-Benz or BMW models, benefit from a slight tax reduction, but the high 40% rate keeps these vehicles out of reach for most.
For the industry, the reform simplifies supply chains and reduces manufacturing costs by allowing input tax credit (ITC) on raw materials.
Auto parts now attract a uniform 18% GST, easing compliance for suppliers. Crisil Intelligence predicts high single-digit growth for two-wheeler sales and modest gains for passenger vehicles in fiscal 2026, driven by these changes. The reform also aligns with India’s sustainability goals, as the unchanged 5% GST on EVs encourages eco-friendly travel options.
Looking Ahead: Opportunities and Challenges
The GST reform sets the stage for a vibrant automotive market, but challenges remain. Manufacturers must pass on tax benefits to consumers, as some may adjust base prices to maintain margins. For travellers, this could dilute savings, especially in the premium segment.
Additionally, while EVs remain tax-favoured, the narrowing price gap with internal combustion engine (ICE) vehicles might slow EV adoption in the short term. The government’s focus on subsidies like the PM E-Drive scheme could counter this by making EVs more attractive.
The reform also opens opportunities for rural and semi-urban markets. Lower tractor and commercial vehicle prices could boost rural mechanisation and connectivity, empowering small businesses and farmers. For urban travellers, cheaper public transport and logistics costs could enhance affordability.
However, the success of the GST reform hinges on effective implementation and consumer trust. Clear communication from manufacturers and dealers about price reductions will be crucial to sustaining demand.
The GST reform of 2025 is a bold step towards affordable mobility. By simplifying taxes and reducing costs, it empowers travellers, businesses, and manufacturers. As India gears up for the festive season, this reform promises a smoother ride for all.
