For several years now, India’s small car market, comprising mostly entry-level models, has been on a downward spiral. Sales of compact cars and hatchbacks fell 15 percent to about one million units in FY2025 from the year-ago period and were less than half that of SUVs, about 2.04 million of which were sold.
But a Goods and Services Tax (GST) overhaul, under which the tax rate on small cars may go down from 28 percent to 18 percent, could be the catalyst for a major market revival.
- Entry-level car prices could drop by about Rs 50,000
- Will reduce principal loan amount and EMIs too
The ex-showroom price of small cars could come down by 12-12.5 percent, VG Ramakrishnan, managing partner at Avanteum Advisors, a company offering advisory and consulting services across automotive and transportation domains, told The Economic Times. “Even if the absolute cut is in the range of Rs 20,000-25,000, it will be a huge positive for consumer sentiment.”
Before and after: what you could pay
Ex-showroom prices could reduce by 10 percent
The most tangible impact of this policy shift for consumers will be a noticeable drop in the on-road price of popular hatchbacks and compact SUVs. While the final price varies by state due to local RTO and insurance, the core benefit from the GST cut would be substantial.
Here’s a look at the before-and-after pricing for two of the most popular entry-level hatchbacks in India, based on on-road prices in New Delhi. Both the Maruti Wagon R and the Tata Tiago will see a drop of over Rs 50,000 in their on-road price, a significant sum indeed.
| Potential change in on-road price | ||
|---|---|---|
| Model | Current on-road price (approx.) | Potential new on-road price (with 18 percent GST) |
| Maruti Wagon R LXi | Rs 6.30 lakh | Rs 5.72 lakh |
| Tata Tiago XE | Rs 5.56 lakh | Rs 5.04 lakh |
(Note: The potential new prices are an estimate based on a 10 percent reduction in the ex-showroom price, which accounts for the shift from a 28 percent GST to an 18 percent GST. Final prices may vary based on other charges and dealer offers.)
Lower principal amount and lower EMI on loans
Could boost consumer sentiment with more affordable loans
Beyond the sticker price, the GST cut could make car ownership more accessible by directly impacting loan affordability. While GST doesn’t apply to the interest component of a car loan, a lower vehicle price means a smaller principal amount to finance. This, in turn, reduces the EMI, making car ownership less of a financial burden.
Industry experts believe this affordability boost could reignite demand, especially in price-sensitive tier-2 and -3 cities. It could also encourage millions of two-wheeler owners to upgrade to a four-wheeler.
A senior executive from a major automobile dealership in Delhi-NCR told The Economic Times that while the upfront savings of Rs 20,000 to Rs 50,000 may seem modest on a large loan, it has a “huge positive impact on consumer sentiment”. The price reduction could also help bridge the gap between hatchbacks and compact SUVs, a segment that has been eating into the small car market.
Could be a key to boosting domestic sales amid export headwinds
The proposed GST cut could boost domestic car sales at a time of increasing global trade tensions. With rising global tariffs, particularly from the US, which has imposed duties of up to 50 percent on certain Indian auto components, the Indian automotive sector is facing export headwinds. This makes a pivot to internal consumption a critical economic lever.
While a tax cut of this magnitude will result in a significant government revenue loss, with some estimates reaching as high as Rs 1.1 lakh crore annually, policymakers are confident that the deficit will be offset. The logic is based on a simple but powerful economic principle: the loss from a lower tax rate will be more than compensated by the higher volume of sales.
Short-term sales likely to be affected
Festive-season demand could be impacted due to delayed purchases
Despite the positive long-term outlook, the lack of clarity on the exact timing of the new GST implementation could lead to immediate and significant disruptions. Our sister publication, Autocar Professional, spoke to a few dealer chains, which said that potential buyers, although making enquiries now, seem hesitant to make a purchase, concerned that they might spend more now on a vehicle expected to become cheaper in the near future.
The timing is particularly critical because this is in the lead-up to the festive season, when the bulk of annual auto purchases traditionally occur in India. Automakers typically begin production ramp-ups months in advance to meet festival demand, and any disruption to buying patterns could leave dealers with excess inventory, potentially triggering production adjustments and affecting thousands of workers across manufacturing facilities.
Lower tax on ICE cars could impact EV adoption
GST on EVs is 5 percent; it is 28-50 percent for petrol, diesel cars
The other big concern is that the GST cut could also potentially impact the uptake of electric cars, as it significantly reduces their tax advantage, which has been a primary driver of EV adoption across the country. Currently, EVs enjoy a substantial edge thanks to a 5 percent GST rate compared to 28-50 percent for internal-combustion vehicles. A lower 18 percent GST on small ICE cars would reduce this gap.
A tax overhaul would affect not just vehicle manufacturers but also the emerging ecosystem of charging infrastructure providers, battery manufacturers and technology companies that have invested heavily in the EV industry.
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