GST reforms to increase demand for automobiles

New Delhi: GST reforms in the automobile sector will increase demand, benefiting automobile manufacturers and ancillary industries such as tyres, batteries, glass, steel, plastics, and electronics, according to the government.

Rising vehicle sales will create a multiplier effect, boosting MSMEs across the supply chain. The rate cuts cover bikes (up to 350cc), buses, small to luxury cars, tractors (less than 1800cc), and auto parts.

The auto industry supports over 3.5 crore direct and indirect jobs in manufacturing, sales, financing, and maintenance. Increased demand will lead to new hiring in dealerships, transport services, logistics, and component MSMEs. Informal sector jobs like drivers, mechanics, and small service garages will also benefit from the GST reductions, the government noted.

“Credit-driven vehicle purchases will support retail loan growth, improve asset quality, and promote financial inclusion in semi-urban India. Rationalised GST rates provide policy certainty, encouraging fresh investments and supporting Make in India initiatives. GST cuts will incentivise replacing old vehicles with new, fuel-efficient models, promoting cleaner mobility,” it added.

Lower GST will reduce prices of bikes, making them more accessible to youth, professionals, and lower-middle-class households. It is expected to help and boost the savings of the gig workers through reduced costs and EMI for 2-wheeler loans.

Cars in the affordable segment will become cheaper, encouraging first-time buyers and expanding household mobility. Reduced GST will stimulate sales in smaller cities and towns where small cars dominate. Higher sales will benefit car dealerships, service networks, drivers, and auto-finance companies.

The removal of the additional cess has not only reduced the rates but also makes taxation simple and predictable.

“Even at 40 per cent, the absence of cess will lower the effective tax on larger cars, making them relatively more affordable for aspirational buyers. Bringing the tax rate to 40 per cent and removing the cess will also ensure that these industries are eligible for ITC fully whereas previously the ITC could only be utilised up to 28 per cent and not for the cess component,” said the government.

India is one of the world’s largest tractor markets and GST cut will push demand in both domestic and export segments. The components for tractor manufacturing like tyres, gears etc will also be taxed at 5 per cent only.

Ancillary MSMEs making engines, tyres, hydraulic pumps, and spare parts will benefit from higher production. The GST Cut will also strengthen India’s positioning as a global tractor manufacturing hub.