As GST 2.0 Aims to Revive Spending, Can Automakers Shift to High Gear?

With the government unveiling sweeping tax cuts in the revamped Goods and Services Tax (GST), the automobile industry has swiftly emerged as one of the clearest beneficiaries. The new structure reduces taxes on most small passenger vehicles and two-wheelers below 350cc to 18%, down from the earlier 28%, potentially ushering in a long-awaited boost to demand.

The overhaul has sharply eased affordability in mass-market categories. Rates have been cut to 18% (from 28% plus cess) for small petrol and diesel cars, motorcycles up to 350cc, three-wheelers, and goods transport vehicles. Larger cars and utility vehicles now face a streamlined 40% levy, compared with 45–50% earlier, while electric vehicles continue to benefit from a concessional 5% rate, a clear sign of policy consistency. Tractors, too, have seen relief with GST lowered to 5% from 12%, a move expected to lift rural consumption. The only dark cloud lies over premium motorcycles above 350cc, where the GST burden has risen to 40% from 31%.

“Automobiles are a clear winner, as small cars, hybrids, and electric vehicle components will now attract only 18% GST instead of 28%, significantly lowering ownership costs and potentially resetting demand trajectories,” observed Hitesh Jain, Lead Analyst at YES Securities.

 “On-road price reduction of around 8% for small cars and two-wheelers, 2%-5% for larger cars,” said Yogesh Aggarwal of HSBC. “With the revised GST structure, tractor prices are expected to decline by around 6%, while commercial vehicles, three-wheelers, and motorcycles below 350cc could see an 8% drop. In contrast, premium motorcycles above 350cc are set to become costlier by about 7%. Large cars and SUVs should benefit from a 3.5–6.5% price reduction,” analysts at Nomura calculated.  

The timing of the government’s push towards consumption revival is also striking. The push towards consumption revival comes as the sector wrestles with sluggish demand growth, global economic uncertainty, and persistent concerns around the supply of rare earth magnets. It is a policy gambit designed to tilt sentiment just ahead of the crucial festive period.

Will GST 2.0 Lift Demand for Automobiles?

The tax cuts introduced in GST 2.0 are aimed primarily to spur consumption across categories by easing the tax burden on consumers. Analysts at Nomura estimate that, if manufacturers fully pass on the benefits, the price reductions could generate a multiplier effect of 1.0–1.5x, implying a 5%–10% potential increase in volumes. “The improved growth outlook should be supportive of consumer sentiment, wider economic activity, and job creation. We estimate volume impact of ~5% for PVs and 2Ws, 2%–3% for tractors and light commercial vehicles,” the firm noted. EV demand, however, may see a marginal setback as the price gap with internal combustion vehicles widens.

Meanwhile, the firm also anticipates the initial demand bump-up to be very high at around 10-20%, as pent-up demand will kick in during the upcoming festive season. While all segments may likely benefit, the lower prices will encourage consumers who have already decided to buy to upgrade.

“Thus, the accelerated shift towards compact SUVs and large SUVs and higher cc bikes is likely in the medium term. GST on freight has been raised to 18% from 12%. We think the freight rates might rise to offset this and lower truck prices could also help. Most B2B freight customers might be able to avail GST credit as well,” it added.

“The rationalization of GST rates is a significant positive for the automobile sector, particularly with the implementation date of September 22, 2025, the first day of Navratri, also helping to allay concerns about delayed festive season sales,” said Heet Chheda of Choice Institutional Equities.

Automakers are also turning optimistic over the upcoming festive season sales. Take the Mahindra Group’s CEO and MD, Anish Shah’s case. Shah, in an interaction with CNBC-TV18 shared that the GST cuts could help drive M&M’s India growth to 8%.

Meanwhile, Santosh Iyer, Managing Director and CEO of Mercedes-Benz India echoed similar words. He anticipates the GST overhaul to trigger a 5-8% drop in luxury car prices. Iyer was also upbeat about near-term demand, anticipating Mercedes-Benz India to see its “best-ever festive season,” buoyed by pent-up demand from August, reduced vehicle prices, and rising consumer purchasing power after the GST rate cuts.

Who’s the Bigger Winner?

Among listed players, M&M is clearly a standout, with broad-based gains across its passenger vehicle, tractor, and commercial vehicle segments. Maruti Suzuki will also benefit significantly from lower rates in the small car space, where it holds dominant market share. Two-wheeler makers such as TVS, Bajaj, and Hero are poised for gains, thanks to reduced levies on motorcycles below 350cc, with TVS and Bajaj enjoying additional support from cuts on three-wheelers.

Eicher Motors should also benefit, as sub-350cc motorcycles account for about 90% of its domestic volumes, although the higher GST on larger bikes is a mild negative. Ashok Leyland, meanwhile, will see a lift from lower GST on trucks and buses, which should aid recovery in the commercial vehicle cycle.

The stock market’s responses also reflect the story as shares of M&M and Eicher Motors logged the sharpest gains in the auto pack, both surging to fresh record highs in the immediate aftermath of the GST announcement.