Small Cars to Luxury Goods: The New GST Hierarchy Explained

Following the 56th GST Council meeting, the Indian government has announced a simple, two-tier GST framework, cutting rates on small cars below 1500cc while heavily taxing bigger luxury vehicles.

The revised rates set to come into effect from September 22, 2025, will impose a flat 18% GST on small cars as opposed to the earlier 28% slab. However, luxury vehicles over 1500cc engine capacity will be taxed as a “Sin Good” at 40% GST.

Small Cars Get a Tax Cut From 28% to 18%

Earlier during his Independence Day speech, PM Modi promised GST rate cuts, highlighting that the middle class will greatly benefit from it. Acting on the promise, the new GST hierarchy is set to bring down the earlier 28% GST on small cars to just 18%.

These reduced rates will apply to all petrol cars up to 1200cc engine capacity and diesel cars up to 1500cc engine capacity, provided that the total length does not exceed 4 metres. Additionally, motorcycles under 350cc will also be taxed at 18% compared to the previous slab of 28%.

Leading small car manufacturers are set to benefit primarily, while buyers will also get relief. Irrespective of whether they pay upfront or opt for financing options.

Luxury Vehicle to Attract a Flat 40% GST

Luxury cars exceeding 4 metres in length will attract a 40% GST rate compared to the previous rate of 28%. This category includes all petrol cars with an engine capacity of more than 1200cc and all diesel cars with an engine capacity of more than 1500cc.

Even bigger motorcycles are set to bear brunt of the revised GST framework. While GST will be reduced for smaller motorcycles, larger-sized bikes over 350cc engine capacity will be taxed at a 40% GST under the new reform.

Implication on Car Loan EMIs

As an immediate consequence of the new GST hierarchy, the overall cost of small cars is anticipated to come down post September 22. For middle class buyers, this translates into lower loan amount and lower monthly EMIs. It is worthwhile waiting for the revised rates to come into effect before financing the purchase of a new small car.

On the contrary, luxury petrol and diesel vehicles are expected to be priced higher once the revised GST rates are implemented. For those who have been planning to buy one, this might be the best time to make the purchase before the prices skyrocket.

To Conclude

The new GST hierarchy is all set to eradicate the flat 28% rate on cars from September 22, 2025. The revised rates for small cars under 4 metres are 18% while luxury vehicles over 4 metres in length will be charged at a steep 40% GST. While this comes as a welcoming relief for potential small car buyers, those planning to purchase bigger luxury vehicles will bear the brunt.

Frequently Asked Questions

What is the new GST rate on small cars?

The GST rate on small cars will be reduced to 18% compared to the previous 28% rate under the new GST framework.

What is the new GST rate on luxury cars?

Under provisions of the new GST hierarchy, larger luxury cars over 1500cc and 4 metres in length will attract a steep GST of 40%.

When will the new GST hierarchy come into effect?

The new GST hierarchy will come into effect from September 22, 2025. The reforms were announced following the 56th GST Council meeting.