Demand for small cars in India could see a resurgence as the government considers reducing taxes on these vehicles under new GST reforms. This potential move aims to make entry-level cars, which have become increasingly expensive in recent years, more affordable. The Indian market has witnessed a decline in demand for small cars over the past few months, affecting sales for manufacturers like Maruti Suzuki, Hyundai, and Tata Motors, who have significant portfolios of entry-level cars. Simultaneously, the rising popularity of SUVs has further impacted the small car segment.
According to sources, the proposed Goods and Services Tax (GST) could place small cars under the 18% tax slab. Currently, these cars face a 28% GST plus a 1% cess, resulting in a substantial tax burden. This definition of small cars includes vehicles with a length of up to 4 meters and engines of less than 1200cc. In contrast, larger cars and SUVs would be subject to a 40% special tax, compared to the current 43-50% tax (GST + cess). Electric vehicles are expected to maintain their current 5% GST rate.
Prime Minister Narendra Modi announced in his Independence Day speech that a new generation of GST reforms is coming, aiming to reduce the tax burden across the country. This reform, expected before Diwali, proposes two tax slabs: maintaining 5% and 18% rates, while eliminating the 12% and 28% tax rates. Additionally, a 40% special rate is suggested for certain items. Daily necessities would attract 5% GST, while items for middle-class consumption and industrial goods would be taxed at 18%. White goods like large TVs and dishwashers could also move from the 28% to the 18% tax bracket, potentially boosting demand.
Market experts predict that an 11% reduction in GST could lead to a 12-12.5% decrease in the ex-showroom prices of small cars. This could translate to direct savings of ₹20,000-₹25,000 per car, providing relief to first-time buyers. This benefit could extend not only to hatchbacks but also to small SUVs like the Hyundai Exter and Tata Punch. A major automobile dealer in Delhi-NCR estimates that the total tax on small cars currently (GST + registration + insurance) amounts to 41-42%.
In the fiscal year 2025, the sale of compact cars and hatchbacks decreased by 13%, reaching approximately 10 lakh units. Conversely, SUV sales increased by 10.2% to 23.5 lakh units. The share of small cars in the total passenger vehicle market has consistently declined for five consecutive years, falling to 23.4%. In the first four months of the current fiscal year, this figure further dropped to 21%. The rising prices of small cars, attributed to stringent safety and emission norms over the past 5-6 years, have increased by 30-40%. Maruti Suzuki’s Head of Marketing and Sales, Partho Banerjee, noted that high prices are preventing entry-level customers from purchasing cars.
Maruti Suzuki, Tata Motors, and Hyundai, known for selling affordable cars, have experienced declining sales recently. In July, Maruti’s annual growth was only 0.2%, Hyundai’s sales decreased by 10.3%, and Tata’s sales fell by 11.6%. These three companies offer various vehicles with engines up to 1200cc. Mahindra has benefited from the increasing demand for SUVs due to its SUV-focused portfolio. Reduced car prices could potentially revitalize hatchback car sales.
