Background
The 56th GST Council meeting held in New Delhi on September 3, 2025, introduced significant reforms aimed at rationalising tax rates across sectors, including the automotive industry. These changes are part of a broader initiative to simplify the GST structure and enhance ease of doing business. The automotive sector, a key driver of the Indian economy, stands to benefit from multiple rate reductions and structural corrections. The changes in rate for automobiles and auto-part is a welcome move making access to mass segment vehicles more affordable for the common man.
- Relief for Entry-Level Vehicles
One of the most notable changes is the reduction of GST from 28% to 18% on small cars and motorcycles with engine capacity up to 350 cc. This move is expected to make entry-level vehicles more affordable, potentially boosting demand among middle-class consumers.
Similarly, three-wheelers, which previously attracted a higher rate of 28%, will now be taxed uniformly at 18%, aligning them with other mass-market vehicles. This reduction provides relief in a segment dominated by small-scale operators and essential for last-mile connectivity.
- Simplification of Auto Parts Taxation
The Council approved a uniform GST rate of 18% on all auto parts, irrespective of their HSN code. Earlier, different parts attracted varying rates of 18% and 28%, which created disputes and compliance issues. This simplification addresses long-standing dispute of classification and inverted duty structures, easing compliance burden for manufacturers, dealers and suppliers.
- Commercial and Special Purpose Vehicles
GST on buses, trucks, and ambulances has been reduced from 28% to 18%. This move lowers acquisition costs and is expected to encourage fleet upgrades, especially in rural and semi-urban areas where public and goods transport vehicles form the backbone of connectivity. The reduction for ambulances also provides relief to the healthcare sector, reducing costs for hospitals and emergency service providers.
- Boost to Agricultural Mobility
For the tractor segment, which plays a vital role in agricultural logistics, the GST rate on tractors, excluding road tractors for semi-trailers with engine capacity exceeding 1800 cc, has been reduced from 12% to 5%. Meanwhile, road tractors for semi-trailers with engine capacity above 1800 cc have seen a reduction from 28% to 18%. The GST rate on various tractor parts and accessories, such as rear tractor tyres and tubes, hydraulic pumps, gearboxes, clutch assemblies and cooling systems, has also been reduced from 12% to 5%.
- Encouragement for Green Mobility
In a push towards sustainability, the GST rate on fuel cell motor vehicles, including hydrogen vehicles based on fuel cell technology, has been reduced from 12% to 5%. This measure is expected to encourage investment and adoption of greener technologies, complementing earlier incentives for electric vehicles.
- Luxury Vehicles to Attract Higher Tax
Luxury and high-end vehicles continue to be taxed at higher rates. Motor cars and other vehicles designed for personal transport, including those with larger engine capacities or lengths exceeding specified thresholds, will now be taxed at 40%, up from 28%. This aligns with the Council's principle of taxing luxury consumption at higher rates while providing relief for mass-market vehicles.
The reduction in tax rates for automobiles and auto-part shall give leeway to Companies to pass on benefits to consumers through lowered prices which shall aid in improved sales. However, since the new rates shall be in effect from September 22, 2025, dealers may face difficulties in liquidating existing stock. Dealers may seek compensation from manufacturers on account of fall in margins as a result of staggered sales.
Companies have a transition period of around 15 days to prepare for implementation of the GST rate changes effective from 22 September, 2025. During the said period, Companies must ensure compliance with key requirements such as reversal of Input Tax Credit (ITC), treatment of common input services under the Input Service Distributor (ISD) mechanism, and other related adjustments. Timely preparation is imperative to avoid compliance issues which shall ensure a smooth transition to the revised GST framework.
Companies must ensure that post supply discounts are granted to customers through issuance of credit notes in accordance with the proposed amendments to Section 34 of the CGST Act read with Section 15(3)(b) of CGST Act.
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