The 56th GST Council meeting has brought one of the most significant changes for the automobile sector since the introduction of GST in 2017. The FAQs released by the government provide clarity on the revised tax structure for cars, effective from 22nd September 2025. The changes aim to simplify the rate structure, remove compensation cess, and ensure transparency for both manufacturers and consumers.
1. GST on Small Cars
- Definition of Small Cars:
- Petrol, LPG, or CNG cars with engine capacity up to 1200 cc and length up to 4000 mm.
- Diesel cars with engine capacity up to 1500 cc and length up to 4000 mm.
- New Rate: 18% GST (earlier 28% + cess).
- Impact: Buyers of hatchbacks and compact sedans will benefit from a significant reduction in overall tax incidence, potentially leading to lower on-road prices.
2. GST on Mid-size and Large Cars, SUVs, and Utility Vehicles
- Definition:
- Vehicles exceeding 1500 cc engine capacity OR length exceeding 4000 mm.
- SUVs, MUVs, MPVs, XUVs with ground clearance of 170 mm and above also included.
- New Rate: 40% GST (no separate cess).
- Earlier Tax: 28% GST + 17–22% cess (total ~45–50%).
- Impact: Tax incidence remains roughly the same, but merging cess into GST simplifies compliance. Luxury vehicles and SUVs continue to attract the highest slab.
3. GST on Three-Wheelers
- Earlier Rate: 28%
- New Rate: 18% GST
- Impact: Brings relief to auto-rickshaw manufacturers and buyers, boosting the affordable public transport sector.
4. GST on Buses and Passenger Vehicles (10+ Seaters)
- Earlier Rate: 28%
- New Rate: 18% GST
- Impact: Reduced costs for buses will benefit the public transport ecosystem and state transport corporations.
5. GST on Ambulances
- Earlier Rate: 28%
- New Rate: 18% GST
- Impact: Lower taxation supports healthcare mobility and reduces costs for hospitals and ambulance providers.
6. GST on Goods Transport Vehicles (Lorries & Trucks)
- Earlier Rate: 28%
- New Rate: 18% GST
- Impact: Brings down costs in the logistics and transport sector, which may indirectly benefit supply chains and reduce freight charges.
7. GST on Tractors and Semi-Trailers
- Tractors: 5% GST (except large road tractors >1800 cc, taxed at 18%).
- Impact: Relief for agriculture and transport operators, ensuring affordability for farmers and small transporters.
8. GST on Motorcycles
- Motorcycles up to 350 cc (including 350cc): 18% GST
- Motorcycles above 350 cc: 40% GST
- Impact: Two-wheeler buyers in the commuter segment gain tax relief, while luxury and premium bikes remain highly taxed.
9. Simplification of Car Tax Structure
Previously, cars were taxed at 28% GST plus Compensation Cess (ranging 1–22%), making the total tax incidence vary between 29% and 50%. Now, the system is simplified to:
- 18% for small cars
- 40% for mid/large cars, SUVs, and luxury vehicles
This shift reduces confusion and removes the additional compliance burden of cess.
Conclusion
The 56th GST Council meeting has streamlined car taxation by introducing two clear slabs—18% and 40%. While small and affordable vehicles become cheaper, luxury and large vehicles continue to bear a higher tax burden. At the same time, tax rates on buses, ambulances, trucks, and three-wheelers have been lowered to 18%, ensuring support for public transport, healthcare, and logistics sectors.
This reform is expected to boost demand in the small car and commercial vehicle segments, while maintaining high taxation on luxury consumption, aligning with the principle of equity in taxation.
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