The Indian government is contemplating tax reforms that could lower the prices of small cars, potentially revitalizing the entry-level vehicle segment. This proposed measure aims to adjust the Goods and Services Tax (GST) structure, reducing the tax burden on smaller vehicles. This move comes in response to shifts in consumer preferences and a decline in sales for certain car categories.
The proposed changes could place small cars under an 18% tax slab, a significant decrease from the current 28% GST plus a 1% cess. Small cars are defined as vehicles with a length of up to 4 meters and engines smaller than 1200cc. Larger vehicles, including SUVs, would be subject to a 40% special tax rate, while electric vehicles would retain their 5% GST.
This initiative aligns with the government’s broader strategy to ease the tax burden, as mentioned by Prime Minister Narendra Modi. The reform proposes a simplified tax structure with two main rates: 5% and 18%, alongside the possible elimination of the 12% and 28% tax brackets. Certain items might be subject to a special 40% tax.
Industry experts suggest that the GST adjustments could significantly reduce the prices of small cars, potentially making them more appealing to consumers. This could benefit not only hatchbacks but also small SUVs, offering relief to first-time car buyers. The decline in small car sales has affected major manufacturers such as Maruti Suzuki, Hyundai, and Tata Motors. Several factors contribute to this decline, including the growing popularity of SUVs and the rising costs associated with small cars.
In the previous fiscal year, sales of compact cars and hatchbacks decreased while SUV sales saw a substantial increase. The market share of small cars has also been declining consistently over the past five years. Manufacturers like Maruti Suzuki, Tata Motors, and Hyundai, who offer many affordable cars, are expected to gain from the price cuts. If these tax reforms are implemented, they could potentially drive sales across the industry.
The potential price reduction could affect the following models: Maruti Swift, FRONX, Dzire, Baleno, Wagon R, Ignis, alto K10, Eeco and Celerio, Hyundai i20, i10, Exter and Aura, and Tata Punch and Tiago.