Booster dose

On Independence Day, Prime Minister Narendra Modi announced the second phase of reforms to Goods and Services Tax (GST) rates. This was followed by a ministerial meeting, where it was proposed that the current four slabs of 5, 12, 18, and 28 per cent be replaced with just two slabs – 5 and 18 per cent. This change is expected to boost demand not only in the automotive sector but also across consumer products.

Once the rates are finalised, demand is likely to pick up for both existing and new vehicles. The next GST Council meeting will be held on 3 and 4 September to finalise and amend the rates. Finance Minister Nirmala Sitharaman will chair the meeting to discuss and announce the revised tax structure.

At present, passenger cars and two-wheelers attract 28 per cent GST. These rates are expected to drop to 18 per cent, bringing down vehicle prices and stimulating customer demand. The Prime Minister’s announcement of ‘GST Reforms 2’ has been welcomed by original equipment manufacturers (OEMs), industry bodies, and customers alike.

According to an industry association: “With the festive season approaching – Onam, Ganesh Chaturthi, Navratri and Diwali – there is a real risk that sales will remain muted until the new GST rates are implemented, compressing demand into the Deepavali window. Dealers have already stocked inventory backed by short-term bank funding of 45-60 days. If retail momentum stays weak, this could create working capital stress across the network. The uncertainty also affects OEM dispatch planning, component supply chains, and loan disbursals by financial institutions. We urge that the GST Council meeting be advanced so that the reforms can be rolled out ahead of the major festivals, spreading demand more evenly across the season.”

Avinash Gorakshakar, Head of Research at Avinash Mentor Research Services, says: “A GST cut from 28 per cent to 18 per cent will be a big booster for demand revival, especially for commercial vehicles, passenger cars, and tractors. This should start having a positive impact from September onwards. The two-wheeler segment will also benefit significantly, accelerating demand in both urban and rural markets. For expensive luxury cars, however, a higher GST is likely to remain in place, as these are considered ‘sin goods’ that attract higher taxation.” He added: “What the industry really wants is clarity on input tax credit, which remains an important issue.”

Reigniting consumer demand

Several leading media and industry analysts have welcomed the proposed GST overhaul as a pivotal reform. The reduction to just two tax slabs – 5 per cent and 18 per cent – could significantly enhance affordability, particularly for small cars, with implementation expected before Diwali. This alignment with India’s peak shopping season is seen as a strategic move to reignite consumer demand and stimulate economic activity. However, concerns remain regarding a possible adverse impact on the electric vehicle segment, where the tax advantage may narrow if small internal-combustion-engine cars move into a lower slab while EVs remain at 5 per cent.

The revised GST rates are expected to come into effect around 22 September, following the Council meeting in early September. The announcement will align with Navratri, an auspicious festive period following which customers are traditionally more inclined towards making big-ticket purchases, particularly in categories such as
electronics, automobiles, and home appliances.