The Goods and Services Tax (GST) Council’s decision to implement a simplified two-rate structure of 5% and 18%, effective September 22, 2025, is expected to revive demand in India’s automobile sector, according to industry experts.
Two-wheelers and passenger vehicles (PVs), which together contribute about 90% of the domestic market’s volume, are forecasted to see demand growth of approximately 200 basis points (bps) and 100 bps, respectively. This is likely to translate into a 5–6% increase in two-wheeler sales and a 2–3% rise in PV sales during the current fiscal year.
Sales of two-wheelers had declined in the first quarter, particularly in entry-level commuter models, due to regulatory disruptions linked to On-Board Diagnostics II (OBD2) implementation and an early onset of the southwest monsoon that affected rural activities. Similarly, PV and small car sales slowed between June and August amid affordability concerns, rare-earth mineral shortages, and deferred purchases in anticipation of upcoming tax cuts.
Apart from boosting demand, the new GST structure is expected to streamline compliance and reduce logistics costs by simplifying interstate taxation, thereby supporting profitability across the value chain.
“With the GST cut fully passed on to consumers, vehicle prices are expected to decline by 5–10%, which translates to around ₹30,000–60,000 for small PVs and ₹3,000–7,000 for two-wheelers. The timing of the rate cut, coinciding with Navratri and the festive season, along with new model launches and softer interest rates, should provide a much-needed boost to the automobile industry’s second half,” said Anuj Sethi, Senior Director at Crisil Ratings.
Under the revised structure, GST rates for small PVs, two-wheelers up to 350cc (which represent nearly 90% of segment sales), commercial vehicles (CVs), and three-wheelers will decrease from 28% to 18%. Mid- and larger PVs will benefit from cuts between 3–7%, while tractors’ rates will be reduced from 12% and 28% to 5% and 18%, respectively.
For CVs, the lower GST is expected to offset increased costs arising from the mandatory AC cabin requirement set to come into effect from October 1, 2025. However, motorcycles with engine capacity above 350cc will face a higher levy, with rates rising from the current 31% to 40%, including compensation cess.
“Higher volumes will enhance capacity utilisation and operating leverage, improving cash flows and margins for automakers, and strengthening their stable credit profiles. On the distribution side, elevated PV inventory levels, currently at 50–55 days, are expected to ease following the GST cuts. Even a modest recovery in demand will support inventory correction, working capital management, and dealer cash flows,” said Poonam Upadhyay, Director at Crisil Ratings.
One key factor to monitor will be how unused tax credits affect dealers’ working capital during the festive season.
