Starting September 22, 2025, India’s GST Council has lowered the GST rate on small cars (less than 4 metres, petrol up to 1200cc, diesel up to 1500cc) from 28% to 18%, plus removed the earlier compensation cess. This change will reduce prices of entry-level cars by ₹45,000 to ₹1 lakh, making them far more affordable for buyers
Key Policy Changes
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GST on small cars: 18% GST for cars under 4 metres (petrol engines up to 1200cc, diesel up to 1500cc).
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No more compensation cess: Previously 1-3% on small cars and 17-22% on premium cars, now eliminated for all segments.
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Luxury and mid-size cars: GST is now set at 40%, but since the cess is removed, the overall tax load is unchanged or slightly reduced in some cases.
Market Impact
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Demand revival: Lower prices are expected to strongly boost demand, especially in Tier 2 and Tier 3 cities during the festive season (Navratri, Diwali).
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Entry-level segment: Share of small cars had dropped from 31% to 27% in total passenger car sales; the rate cut is projected to reverse this trend.
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Broader accessibility: First-time car buyers and middle-class families will benefit the most from affordable prices.
For Electric Vehicles
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EVs GST unchanged: Electric cars remain taxed at just 5%, no hike or cut announced for this segment
Industry Reactions
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Society of Indian Automobile Manufacturers (SIAM): President Shailesh Chandra welcomes the GST cut, saying it will energize the sector and improve vehicle affordability for more Indians.
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Grant Thornton Partner Saket Mehra: Predicts buyers will save up to ₹1 lakh, spurring a strong festive season demand boost.
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FADA President C.S. Vigneshwar: Believes the move brings major benefits for customers as prices come down directly.
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Auto manufacturers: Say this will help even the premium segment, as removal of cess means overall cost slightly drops for luxury cars.
Summary Table
| Car Segment | Old GST+CESS | New GST | Price Drop |
|---|---|---|---|
| Small (sub-4m, petrol ≤1200cc, diesel ≤1500cc) | 28–31% | 18% | ₹45,000–₹1,00,000 |
| Mid-Size & Premium | 28% + 17–22% | 40% | Slightly cheaper or similar |
| Electric | 5% | 5% | No change |
The new tax structure applies nationwide from September 22, in time for the festive season, so it is the best time for car purchases in
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