The introduction of simplified tax rates under GST 2.0 is expected to bring significant relief to the automotive sector, potentially stimulating a recovery amid sluggish sales. The GST Council streamlined the tax system with two primary slabs: 5% and 18%, concurrently eliminating the cess on vehicles.

Specifically, petrol, LPG, and CNG vehicles equipped with engines under 1200cc and a length below 4,000 mm, along with diesel vehicles up to 1,500cc and 4,000 mm in length, will now be subject to an 18% GST, replacing the previous 28% rate.

Conversely, all petrol cars exceeding 1200cc and diesel vehicles above 1500cc will be placed in the 40% GST bracket.

Furthermore, a 40% GST will be imposed on all automobiles above 1200cc and longer than 4,000 mm, motorcycles over 350cc, racing cars, and yachts and aircraft intended for personal use.

Electric vehicles (EVs) will continue to be taxed at 5%, while three-wheelers will attract an 18% GST.

During its 56th meeting, the GST Council approved a reduction in the tax rate for small cars, lowering it to 18% from the previous 28%. Larger vehicles, including SUVs, will now be taxed at 40% without any additional cess, effectively lowering the overall tax burden. Electric vehicles continue to benefit from a 5% GST rate, while all automotive components, regardless of the vehicle type, are subject to an 18% tax.

The GST Council has categorized a small car as one that is under four meters in length, equipped with petrol, CNG, or LPG engines below 1,200 cc, and diesel engines below 1,500 cc. Cars exceeding these specifications will fall under the 40% GST bracket.

The updated GST rates apply across a range of vehicles, from entry-level models to luxury cars in the mass-market segment. The changes include adjustments for brands such as Maruti Suzuki, Mahindra, Hyundai, Tata Motors, KIA India, Toyota India, JSW MG Motor, Honda Cars India, Renault/ Nissan, and Skoda/VW.

A concern for some buyers is the higher 40% GST on vehicles with slightly larger 1500cc engines. These are often helpful in hilly regions. A similar situation exists for two-wheelers, where motorcycles with an engine capacity of 350 cc or more will attract higher taxes.

Sitharaman explained that the GST Council agreed on a two-rate GST system. The 12% and 28% tax slabs have been eliminated, with a consensus reached on the new 5% and 18% rates. She emphasized that the middle class will benefit the most from these changes, with essential items for the common man being moved from the 12% and 18% brackets to 5%. Items taxed at 5% have been reduced to zero percent.