India's Deepest Tax-Cut Plan In Years To Spur Automobile Demand

India is looking to slash a local tax on small cars to 18% while levies on premium cars may be pared to 40%, people familiar with the matter said, as the Narendra Modi-led government seeks to bolster consumption demand.

Motorcycles of up to 350cc are also expected to be in the 18% goods and services tax, or GST, band but premium bikes will likely attract some version of a luxury tax, the people said, asking not to be identified as the discussions are private. Electric vehicles will continue to be taxed at 5%, they added.

The sweeping changes proposed — the first major consumption tax cut in nearly a decade — will be a major reprieve in the world’s third-largest automobile market.

Buyers of two-wheelers currently face local levies of 28%, while those purchasing small cars have an effective tax burden of up to 31%. For expensive cars, it’s as high as 50%. The proposed policy tweak was reported earlier in the day by local media, including The Economic Times.

India’s finance ministry didn’t immediately respond to an email seeking comments.

The proposals have been sent to a panel of state finance ministers, which is expected to meet soon, Bloomberg News reported Monday citing an official. The proposal is expected to be taken up by the GST Council in September or early October.

The long-awaited simplification of India’s GST structure, announced by Modi on Aug. 15, seeks to boost consumption demand across sectors and offset the impact of US President Donald Trump’s threats to impose 50% tariffs on Indian exports from Aug. 27. Modi has also urged Indians to buy more local goods.

The tax cuts could lead to double-digit growth for passenger vehicles in India with sales crossing 5 million units for the year ended March 2027, according to Jay Kale, analyst at Elara Securities India Pvt.

Sector leader Maruti Suzuki India Ltd. surged 8.8% in Mumbai on Monday, the most since April 2020, while Hyundai Motor India Ltd. jumped 8.2% after Modi’s Aug. 15 announcement.

Two wheeler giants, TVS Motor Co. rose 6.6%, the most in almost four years, and Bajaj Auto Ltd. advanced 4.6%.

“In the last five years, the prices of entry-level motorcycles have risen nearly 40%, similar to the pressure seen in small cars,” making them unaffordable for many buyers, Rakesh Sharma, Bajaj Auto’s executive director said. 

These proposed tax cuts could unlock domestic consumption, particularly at the bottom of the pyramid, according to Sharma.