The Indian government is preparing to roll out what could be the most significant overhaul of the Goods and Services Tax (GST) system since its launch in 2017. The reform, expected to be finalized in the GST Council meeting on September 3-4, 2025, is being described as a game-changer for consumers and the automobile industry. With the proposed GST 2.0, the government aims to simplify the tax structure, reduce vehicle costs, and give a major boost to price-sensitive consumers, particularly those in the small car and two-wheeler segments.

Proposed GST Reforms: A New Two-Slab Structure

The current GST system operates on four slabs—5 percent, 12 percent, 18 percent, and 28 percent—along with additional cess on certain categories like automobiles. The proposed GST 2.0 seeks to simplify this into a two-slab system:

• 5 percent for essential goods

• 18 percent for most goods and services, including small cars and two-wheelers

• 40 percent for luxury goods, sin products, and larger vehicles like SUVs and premium cars

This move will eliminate the 12 percent and 28 percent slabs for most products. For automobiles, the implications are significant.

• Small cars (under 4 meters with petrol engines up to 1,200cc or diesel engines up to 1,500cc) will see GST reduced from 28 percent (plus 1-3 percent cess) to 18 percent (plus 1 percent cess).

• Two-wheelers with engines below 350cc will shift from 28 percent to 18 percent GST.

• Larger vehicles, which currently face 28 percent GST plus a cess of up to 22 percent (a total of 43-50 percent tax), will be moved to a flat 40 percent slab, slightly reducing overall taxes.

• Electric vehicles (EVs) will continue to benefit from the 5 percent GST rate to promote green mobility.

In addition, the government is considering slashing GST on insurance premiums, including mandatory motor insurance, from 18 percent to 5 percent or possibly 0 percent. Since every vehicle in India requires insurance, this step could further reduce the cost of ownership.

The Council is expected to approve these changes in the September meeting, with implementation scheduled around Diwali 2025, traditionally the peak season for auto sales.

How Car Prices Will Change

The reduction in GST will directly impact ex-showroom prices, bringing down overall on-road costs. According to estimates from Nomura and other industry reports, popular models will become significantly cheaper.

• Maruti Suzuki Wagon R: Price to drop from ₹7,48,228 to ₹6,84,426, a reduction of ₹63,802. EMI savings of ₹1,047 per month.

• Maruti Suzuki Baleno: Price reduction of ₹75,940, with EMI savings of ₹1,246 per month.

• Maruti Suzuki Dzire: Price drop of ₹80,624, with EMI savings of ₹1,324 per month.

• Mahindra Bolero Neo: A sharp cut of ₹1,37,952, with EMI savings of ₹2,265 per month.

• Maruti Suzuki Brezza: Price down by ₹39,870, with EMI savings of ₹654 per month.

• Hyundai Creta: Price drop of ₹55,585, with EMI savings of ₹912 per month.

• Mahindra XUV700: Price to fall by ₹1,17,911, with EMI savings of ₹1,935 per month.

General estimates suggest that small cars will see a price reduction of 7.7-8.5 percent, compact SUVs around 7.7 percent, larger SUVs and premium models 3.4-6.7 percent, and two-wheelers between ₹6,000 and ₹18,000 cheaper.

Additional Savings on Insurance

If GST on insurance premiums is cut from 18 percent to 5 percent, a typical motor insurance policy costing ₹20,000 per year would become cheaper by ₹2,600. If GST is removed completely, buyers could save as much as ₹3,600 annually.

EMI Benefits for Buyers

With lower prices, loan amounts will shrink, resulting in reduced EMIs. For the average buyer financing a car with a 5-year loan at 9.5-10 percent interest, the savings will be significant:

• Small cars: EMI savings of ₹1,000 to ₹1,324 per month.

• Compact SUVs: EMI savings of ₹654 to ₹2,265 per month.

• Mid-size SUVs: EMI savings of ₹912 to ₹1,935 per month.

These benefits make vehicle ownership more accessible, especially for first-time buyers and middle-class families.

Impact on the Auto Industry

Industry analysts expect this reform to transform the auto sector, which has been struggling with weak demand. Nomura projects a 5-10 percent jump in vehicle sales if GST cuts are implemented.

• Demand Boost: Small cars and two-wheelers will see the highest surge in demand, benefiting mass-market manufacturers like Maruti Suzuki, Hyundai, and Tata Motors. Mahindra will also gain from reduced prices of models like the Bolero Neo and XUV700.

• Festive Advantage: If rolled out by Diwali, sales could see a strong revival. However, delayed implementation could slow down the market temporarily as buyers postpone purchases.

• Consumer Trends: While small cars will see the highest percentage drop, many buyers continue to prefer stylish, feature-rich SUVs, so a major shift back to entry-level cars may not happen.

• Economic Growth: More car sales will boost manufacturing, jobs, and overall economic growth, especially in smaller towns where affordability drives purchases.

Risks and Challenges

While the reform looks promising, some risks remain. Manufacturers may not pass on the full benefit to customers, supply chain issues could limit availability during festive season demand, and the government may face a revenue shortfall of $4-5 billion from reduced GST collections. Clearer classification rules will also be needed to avoid disputes over bundled services or accessories.

What Buyers Should Do

• Those planning to buy small cars or two-wheelers may benefit from waiting until after the September GST Council meeting for lower prices.

• For larger SUVs like the Creta or XUV700, the price reduction will be smaller, so festive discounts or dealer offers might be more attractive than waiting.

• Buyers should check with dealers about price-protection clauses to safeguard against losses if GST cuts are introduced after their purchase.

Broader Context and Government’s Objective

Prime Minister Narendra Modi has described this reform as a “double Diwali gift” for the middle class, aimed at reducing costs while simplifying compliance. The auto industry has faced sluggish demand in FY26, with car sales down 1 percent and two-wheeler sales down 4 percent. Along with the RBI’s recent repo rate cut to 6 percent, the GST reduction could provide a powerful boost to consumer demand.

conclusion

If approved in the September 2025 GST Council meeting, these reforms could reduce car prices by up to ₹1.4 lakh and cut EMIs by as much as ₹2,265 per month. Small cars like the Wagon R, Baleno, and Dzire stand to benefit the most, while SUVs like the Bolero Neo and XUV700 will also see substantial price cuts. Insurance premiums may fall further, making ownership even more affordable. For consumers, this could be the best time in years to purchase a vehicle, and for the industry, a much-needed revival.