GST cut likely to rev up auto demand; two-wheelers and small cars to gain most: Report

The auto sector has seen muted demand in recent months, with April–July registrations rising only 2–3 per cent year-on-year for two-wheelers and passenger vehicles.

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The Indian automobile industry is poised for a demand revival with optimism building around a potential Goods and Services Tax (GST) rate reduction, according to a report by Jefferies. The rationalisation, expected to be announced early next month, could bring the sharpest benefits to two-wheelers and small passenger vehicles.The report estimates that a cut in GST slabs—from 28 per cent to 18 per cent for most vehicles and from 12 per cent to 5 per cent for tractors—would lower on-road prices by 6–8 per cent, significantly improving affordability. “This would support demand recovery and provide a meaningful boost to consumer sentiment,” the report said.Two-wheelers, currently taxed at 28–31 per cent, and sub-4-metre cars, attracting around 29–31 per cent tax, are expected to gain the most. Large SUVs, now facing an overall levy of 45–50 per cent, may also get partial relief if effective rates drop to around 40 per cent. Tractors could benefit from a GST reduction from 12 per cent to 5 per cent, though Jefferies cautioned this could create an inverted duty structure due to higher input costs.Hybrid vehicles may also see strong traction if their tax rates are aligned closer to battery electric vehicles (BEVs), which currently attract only 5 per cent GST. At present, hybrids are taxed at similar levels as internal combustion engine (ICE) vehicles by most states.

Future outlook

The report raised its FY26–28 industry volume estimates for two-wheelers and passenger vehicles by 2–6 per cent, projecting a compound annual growth rate (CAGR) of 10 per cent for two-wheelers and 8 per cent for PVs over FY25–28. Tractor sales are expected to maintain a 9 per cent CAGR, while trucks are likely to grow at a slower pace of 3 per cent.The auto sector has seen muted demand in recent months, with April–July registrations rising only 2–3 per cent year-on-year for two-wheelers and passenger vehicles. However, Jefferies expects momentum to pick up in the festive season, aided by income tax cuts, easing liquidity and the anticipated GST rate cut.