PM's Diwali Dhamaka may come as GST cuts on small cars, insurance premiums

Centre mulls lowering GST on small cars to 18 per cent and slashing levies on health and life insurance

Prime Minister Narendra Modi’s Diwali “dhamaka” for consumers may come in the form of cuts in Goods and Services Tax (GST) on small cars and insurance premiums.

 

According to a report by Reuters, citing government sources, Centre has proposed lowering GST on small petrol and diesel cars to 18 per cent from 28 per cent, and reducing GST on health and life insurance premiums to 5 per cent from the current 18 per cent, or even exempting them entirely.

 

If cleared, the relief package could be unveiled before Diwali in October, India’s busiest retail season, and just weeks ahead of the Bihar Assembly election.

 

 

PM Modi, in his Independence Day address, promised “next generation” GST reforms to ease the burden on consumers and micro, small and medium enterprises.

 

Larger GST overhaul in the works

PM Modi's rationalisation agenda is built on three pillars, the Reuters report said. This includes structural reforms, rate simplification, and ease of living. It seeks to correct inverted duty structures, reduce classification disputes, and eventually move towards a simplified two-slab structure with standard and merit rates while phasing out the 12 per cent slab.

 

Moreover, as the compensation cess on luxury and sin goods is set to end, the Centre sees an opportunity to use that room to cut GST on everyday and aspirational products without hurting revenues. 

 

Compensation cess expiry and GST review

Compensation cess refers to the extra levy introduced in 2017 on luxury and sin goods such as coal, tobacco, aerated drinks, and large cars. It was designed to compensate states for revenue losses after GST replaced earlier state taxes like VAT and octroi.

 

Originally meant to expire in 2022, the cess was extended until March 2026 to help cover revenue shortfalls caused by the pandemic. Once it lapses, the Centre will have greater flexibility to rationalise GST rates without relying on this additional revenue stream.

 

Small cars to see turnaround

Small cars, defined as those under four metres with petrol engines up to 1,200cc and diesel engines up to 1,500cc, have steadily lost ground to SUVs, shrinking from nearly half the passenger vehicle market pre-pandemic to about one-third of the 4.3 million units sold in FY24.

 

A lower tax rate could help revive demand in this category, which remains significant for manufacturers such as Maruti Suzuki, Hyundai Motor India, and Tata Motors.  ALSO READ | GST reforms: How and where to invest in the stock market? Analysts decode

Big cars may get costlier

The government is also considering a 40 per cent special GST slab for larger vehicles, which currently attract 28 per cent GST plus a compensation cess of up to 22 per cent, taking the effective burden close to 50 per cent. Officials are weighing whether to impose supplementary levies to keep the final incidence within the existing 43-50 per cent band.

 

Insurance relief on the cards

Households may see additional relief through cheaper health and life insurance. Cutting GST to 5 per cent from 18 per cent or zero would help lower premiums and expand coverage in a country.

 

GST Council to meet in September

The matter has been referred to the Group of Ministers set up by the GST Council, which is expected to take place on September 9, according to a report by CNBC-TV18.

 

If approved, the package would mark the most significant GST restructuring since 2017.