The Indian government is considering tax reforms that could lead to lower prices for small cars, potentially boosting demand in the entry-level segment. Proposed changes to the Goods and Services Tax (GST) could place smaller vehicles in a lower tax bracket, making them more affordable. This move comes as the market sees a shift in consumer preferences, with SUVs gaining popularity while sales of smaller, more affordable cars have declined.
The potential GST reform involves moving small cars into the 18% tax bracket, down from the current 28% GST plus a 1% cess. Small cars are defined as those with a length of up to 4 meters and engines under 1200cc. Larger vehicles, including SUVs, would face a higher tax rate of 40%, while electric vehicles will maintain their existing 5% GST rate.
This reform aligns with the government’s broader goal of reducing the tax burden across the nation, as announced by Prime Minister Narendra Modi. The GST reform proposes two primary tax rates: 5% and 18%, with the potential elimination of the 12% and 28% tax brackets. Certain items may be subject to a special 40% tax. The changes are expected to benefit consumers by reducing the cost of entry-level vehicles and could also impact the prices of other goods.
Experts suggest that a reduction in GST could result in significant price cuts for small cars, potentially making them more accessible to a wider range of buyers. This price reduction could benefit both hatchbacks and small SUVs, and could provide relief to first-time car buyers. Declining sales figures for small cars have affected major manufacturers like Maruti Suzuki, Hyundai, and Tata Motors. The shift in consumer preference toward SUVs and the rising costs of small cars have contributed to the downturn.
Last year, the sales of compact cars and hatchbacks decreased, while SUV sales continued to grow. This trend has also impacted the market share of small cars. Maruti Suzuki, Tata Motors, and Hyundai, who offer a variety of affordable vehicles, are expected to benefit from the price cuts. The reduced prices could incentivize sales of models like the Maruti Swift, Hyundai i10, and Tata Punch.
These potential changes may help boost sales for manufacturers of smaller vehicles, and make entry-level cars more accessible to Indian consumers. The models that may become cheaper include Maruti Suzuki Swift, FRONX, Dzire, Baleno, Wagon R, Ignis, Alto K10, Eeco and Celerio, Hyundai i20, i10, Exter and Aura, and Tata Punch and Tiago.