Autobayng News Team
Overall, the GST rate cut represents a structural positive for the automotive sector.“>
In one of the most significant tax reforms in recent years, the GST Council’s rate rationalisation marks a structural reset for the Indian automotive industry. The realignment of GST rates across all segments and the value-chain, including auto components, is a welcome move expected to benefit the sector as a whole. Consumers will gain from improved affordability, while manufacturers will see improved capacity utilisation.The commercial vehicle segment is also likely to gain—directly through lower end-customer prices and indirectly from the broader economic activity and freight movement that the GST rate cuts may stimulate.
Two-wheelers – Chasing the pre-pandemic peak
Domestic two-wheeler (2W) sales volumes peaked in 2019 and have since declined, weighed down by the after-effects of Covid, higher ownership costs, rising inflation, and muted income growth among core consumers. The GST rate cut to 18 per cent from 28 per cent on sub-350 cc engine capacity 2Ws—which represent over 90 per cent of industry volumes—will lower on-road prices, improving affordability. Combined with factors such as favourable rural demand and festive season promotions, this move could help volumes return to the pre-pandemic levels. However, for models above 350 cc, the 9 per cent increase in the effective GST rate (including cess) could temper demand momentum, potentially slowing upgrades to the premium segment.
Passenger vehicles – Small cars to regain sheen
Over the past 3-4 years, the domestic passenger vehicle (PV) industry has navigated multiple headwinds, including supply chain disruptions, regulatory changes that sharply increased vehicle prices, and elevated dealer inventory levels—currently at about 55 days versus a normalized level of around 30 days. During this period, new trends emerged—most notably the premiumisation of vehicles and a shift in powertrain preferences. The Utility Vehicle (UV) segment became the preferred choice, driven by changing consumer tastes and a slew of new model launches. Consequently, UVs accounted for around 65 per cent of total car production, up from 50 per cent in FY2023, while demand for entry-level cars remained muted. The GST rate cut on small cars, micro-SUVs and compact-SUVs is expected to revive sentiment in the entry-level and mid-market segments, helping dealers clear inventory in the upcoming festive season. The luxury segment will also benefit from the rationalization (cess adjusted), though its share of overall industry volumes is currently modest.
Commercial vehicles – To gain from expected rise in broader economic activity
At a time when freight operators are facing margin pressures from higher operating costs, the GST rate cut on commercial vehicles (CVs) comes as timely relief for the logistics sector and CV demand. Lower GST on vehicles and auto components will reduce acquisition cost for fleet owners, while lower GST on tyres, which need to be replaced periodically, will reduce operating costs and accordingly support cashflows. Additionally, the broad-based GST reduction across agriculture and manufacturing sectors is expected to spur economic activity, providing incremental demand for both LCV and M&HCV segments. Bus demand may also strengthen as operators reassess fleet modernisation plans in light of lower upfront costs. Together, these factors position the CV industry for a new growth cycle.
Electric vehicles – Sustainability story to evolve
India’s electrification journey is currently led by two- and three-wheelers and buses, unlike other markets where passenger cars dominate. While adoption gathered pace in the initial years, momentum has slowed over the past year. With GST on electric vehicles retained at 5 per cent, the price gap with internal combustion engine vehicles will narrow, potentially reducing the total cost of ownership (TCO) advantage that EVs currently enjoy. How consumers respond—balancing long-term sustainability pathway against pure-play economic considerations—remains to be seen.
Auto components – Towards strong replacement push
The replacement market accounts for 15 per centof the overall auto component industry (excluding tyres), while for the tyre industry, it represents nearly two-thirds of total demand. The GST rate cut will help narrow the price gap between OEM-authorised spare parts and unauthorised spares, strengthening the position of organised aftermarket players.
At a time when export markets are facing headwinds from macroeconomic uncertainties and tariff-related challenges, this policy change offers timely support to the domestic auto components sector.
Overall, the GST rate cut represents a structural positive for the automotive sector. Beyond easing near-term pressures, it reinforces long-term objectives by improving affordability, supporting rural mobility, and generating employment in the manufacturing sector. These measures strengthen the sector’s role as a key driver of India’s next phase of economic growth.
(The author is Senior Vice President & Co-Group Head, Corporate Ratings of ICRA Limited)
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