GST Reform 2025: If the government reduces GST on cars, how much will the prices of cars come down? Let us also know how GST is currently levied on cars.
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Buying a car in India is still considered a dream for the middle class. The reason is simple: heavy taxes on cars. At present, there is talk that the government may reduce GST on cars from 28% to 18% before Diwali 2025.
If this happens, popular vehicles like Alto, Creta, Scorpio and Fortuner can become quite cheap. This will have a direct impact on your pocket and your EMI. Let's understand how GST is currently levied on cars and if it is reduced, what will be the impact on the prices of cars.
How is GST levied on cars currently?
Currently, GST rates for automobiles in India are not uniform. These depend on the length of the car, engine displacement and fuel type (petrol, diesel or electric). Small petrol-powered cars less than 4 metres in length and with an engine displacement of up to 1.2 litres attract 28% VAT and 1% excise duty.
This means the total tax rate comes to 29%. On the other hand, large petrol or diesel-powered cars that are longer than 4 metres or have an engine displacement of more than 1.5 litres attract 28% VAT and 3% to 15% excise duty. Because of this, the total tax rate on these vehicles can range from 31% to 43%.
The tax rate for electric cars is kept very low, only 5% GST is levied on them. For used cars, if sold through dealerships, GST is levied at the rate of 18% on the profit margin. This clearly means that currently, almost one-third of the actual price of the car is paid in taxes only.
What will happen if GST is reduced from 28% to 18%?
If the government reduces the GST rate on automobiles from 28% to 18%, it will directly benefit consumers. First of all, the prices of cars will fall. The price of small cars can come down by about Rs 55,000. The prices of big cars will also come down, as the effect of tax reduction will also be seen. Apart from this, sales should also increase due to the reduction in tax.
When vehicles become cheaper, people will be able to buy them in large quantities. This will directly benefit the automobile industry. Increasing car sales will increase corporate profits and may also increase employment opportunities.
For example, if the basic price of a car is Rs 5 lakh, then after adding tax it will become around Rs 6.45 lakh. At the same time, if the government reduces GST to 18%, then after adding vehicle tax, the total tax will be 19%. In such a situation, now the same car can be purchased for Rs 5.90 lakh. In other words, customers will get a direct benefit of about 10%.
The biggest benefit for customers will be the reduction in EMI. Due to the reduction in the price of the car, the loan amount will be less and the EMI will also be less. In this way, the dream of buying a car will no longer remain just a dream, but can become a reality.
Suppose today cars are charged 28% GST and various vehicle taxes, which makes them expensive. If the government reduces GST to 18%, then thousands of vehicle buyers will directly benefit. Cars will become cheaper, the burden of EMI will be reduced and the sale of cars will increase.
Confusion among customers and concern among dealers
Suppose the news of reduction in GST has put customers in a dilemma. Dealers in Delhi-NCR say that the demand for cars was very high in the beginning of August, but now people are just asking when the GST will be reduced before booking. Buyers are afraid that if they buy a car now and the tax is reduced by Diwali, they will suffer a loss.
Dealers are equally worried. They have paid full tax on cars they already bought. If GST is reduced further, new cars will sell at a lower tax rate and the price of old cars will increase. This could also increase their working capital and interest burden. Because of this, many dealers now have only a small stock of best-selling models.
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