GST cut to drive 200 bps boost in two-wheelers, 100 bps in PVs: Crisil

GST Council's two-rate tax structure to cut vehicle prices by up to 10%, supporting festive auto sales for two-wheelers, small cars, and compact SUVs

The Goods and Services Tax (GST) Council’s decision to move to a two-rate structure is expected to provide a much-needed boost to automobile sales, particularly in the mass-market segments, according to Crisil Ratings.

 

Sales of two-wheelers, which make up about 75 per cent of the domestic automobile market, are expected to grow 5-6 per cent this fiscal, aided by a 200 basis points (bps) volume push from the GST cut. Meanwhile, passenger vehicles (PVs), which account for about 15 per cent of industry volumes, could see a 100 bps lift, with sales rising 2-3 per cent.

GST cuts on auto

On Wednesday evening, the GST Council, chaired by Union Finance Minister Nirmala Sitharaman, reached a consensus to simplify the GST regime into two slabs – 5 per cent and 18 per cent, effective September 22. 

Under the revised structure, GST on small cars and two-wheelers up to 350cc will fall to 18 per cent from 28 per cent. Mid- and larger passenger vehicles will see a 3-7 per cent reduction, while tractors will benefit from a sharp cut to 5-18 per cent, down from 12-28 per cent. In contrast, high-end motorcycles above 350cc will become costlier, moving to a 40 per cent special rate from the existing 31 per cent.

 

In short, small cars and bikes under 350cc will get significantly cheaper, large cars and SUVs moderately cheaper; however, big bikes will become more expensive. 

Auto demand poised for an upswing

The move is expected to boost sales in the entry-level auto market, which has struggled since the pandemic and in recent months due to regulatory disruptions from the On-Board Diagnostics II (OBD2) rollout, weak demand for entry-level commuter bikes, and affordability concerns in passenger vehicles. 

 

A shortage of rare-earth minerals and consumer deferment of purchases in anticipation of the tax change further slowed sales in June-August  ALSO READ | GST on luxury cars, SUVs now at 40%, but it's still good news for consumers

Auto price after GST cuts

If the GST cut is fully passed onto the consumer, then prices could drop 5 to 10 per cent.  

Estimated price reductions across segments are as follows:

• Up to ₹60,000 for small cars
• ₹15,000–20,000 for three-wheelers
• ₹1-2.5 lakh for medium and heavy commercial vehicles

Electric passenger vehicles and three-wheelers remain unaffected, with GST at 5 per cent.

 

“The timing, coinciding with the festive season, softer interest rates, and new launches, should drive a stronger second half for the auto sector,” said Anuj Sethi, senior director at Crisil Ratings.  ALSO READ | GST cut makes cars, bikes, tyres cheaper, Diwali comes for Auto Inc

Rural demand, dealers

According to Crisil, improved rural incomes, a good monsoon, and more than 15 new or refreshed compact SUV models this year will further aid demand recovery. However, analysts flagged potential dealer-level pressures around unutilised tax credits during the festive period.

 

“Higher volumes will improve capacity utilisation and operating leverage, translating to stronger cash flows and healthier margins for automakers,” said Poonam Upadhyay, director at Crisil Ratings. Elevated passenger vehicle inventory of 50-55 days is expected to ease post-GST cut, relieving working capital strain and supporting dealer liquidity.