The Union government’s Goods and Services Tax (GST) rationalisation proposal, which has already been approved by the Group of Ministers (GoM), has sparked uncertainty and speculation in the automobile industry regarding the new tax structure.
As part of the proposed GST restructuring, the 12% and 28% slabs will be removed, and the 5% and 18% slabs will be retained. Also, a new 40% slab will be added for sin and luxury goods. Details regarding the new structure will be announced following the GST Council meeting on September 3 and 4.
In India, all types of internal combustion engine (ICE) vehicles, from passenger vehicles (PVs) to two-wheelers, three-wheelers and commercial vehicles (CVs), attract a GST of 28%. Depending on the vehicle category, a compensation cess, ranging from 0% to 22%, is also levied.
The electric vehicles (EVs) and hydrogen fuel cell vehicles (FCEVs) come under 5% and 12% GST slabs, respectively, with no compensation cess.
Speculations are that with the removal of the 28% slab, the relatively smaller cars will be moved to the 18% slab, while the larger PVs will come under the new 40% slab. However, it is not clear whether the compensation cess will be levied or abolished.
In the case of small ICE cars (in terms of length and engine capacity), the compensation cess ranges from 1-3%. However, for the large ICE models, it is from 17-22%.
A couple of Delhi-NCR-based dealers told Moneycontrol on the condition of anonymity that their respective brands have asked them not to build up inventory unless there is clarity on the new GST rates and compensation cess, and place orders only for confirmed retail sales.
The dealers said that amid all the speculation, many customers have postponed their decision to buy cars, and some have even cancelled their bookings.
The PV segment has been grappling with soft demand over the past few months. Carmakers were expecting green shoots as the festive season started in the country with Onam and Ganesh Chaturthi in August.
“The recent speculation about the change in GST rates has caused uncertainty in the minds of consumers. Consumer interest and demand are strong, but they have adopted a wait-and-watch approach, and this delayed decision-making is impacting new vehicle sales at a certain level. Expediting clarity on GST rates is essential to get back to speed and ensure the auto sector’s contribution to economic growth during this quarter is robust,” said President and CEO, BMW Group India.
On the EV front, there have been reports that models priced above Rs 20 lakh might be placed under the 18% slab.
A company executive, who did not wish to be named, said that the electric car market is still at a nascent stage in India, and increasing GST on electric models might derail our country’s EV journey. He also noted that increasing GST on electric models in the Rs 20 lakh plus bracket might come as a setback for customers looking for EVs that offer a high range.
For reference, the electric models contributed just 4.7% to the overall PV sales in India in July 2025, according to data from the Federation of Automobile Dealers Associations (FADA).
“We also hope that the sustainable push towards electric cars will continue to be encouraged as a priority and will reflect in the GST strategy by retaining the existing 5% GST on all passenger electric vehicles,” BMW said.
For the two-wheeler segment, it is being speculated that a twin GST structure will be adopted, wherein ICE models with an engine capacity of up to 350cc will attract 18% tax, while those with an engine capacity of over 350cc will be placed in the 40% slab.
At present, ICE two-wheelers are under the 28% slab. The compensation cess on them ranges from nil to 3% depending on the engine capacity.
“India’s two-wheeler industry is the clearest success story of the Make-in-India initiative and the only manufacturing sector where Indian brands lead globally. Driven by strong government support and a large domestic base, Indian manufacturers have achieved unmatched scale and capability, setting international benchmarks in technology, quality, cost-efficiency, and distribution. This strength has even drawn global competitors to manufacture in India,” said by the Executive Chairman, Royal Enfield.
“Indian brands already dominate the small-capacity segment worldwide, and through heavy investment, we are now making deep inroads into mid-capacity motorcycles. By delivering exceptional value, we are drawing riders worldwide to shift from larger, higher-displacement machines to Indian-made mid-size motorcycles. To sustain this momentum, a uniform GST of 18% across all two-wheelers is critical,” he added.
Royal Enfield is among the largest mid-size (250-750cc) two-wheeler manufacturers in the world.
According to Lal, lowering GST for sub-350cc models will help broaden access, but raising GST for over-350cc models would damage a segment vital to India’s global edge.
