Small Cars Under 1200cc And Sub 350cc Bikes To Get Cheaper: Here's Why

The central government is reportedly considering a major revision in the GST (Goods and Services tax) structure for small cars. The centre has now proposed a categorisation based on engine capacity. If approved, this will pave the way for lower tax rates on petrol-powered small cars with engine capacities of under 1200 cc. If this goes through, many of the budget cars will benefit from lower slabs. At present, the definition of SUVs under GST is rather confusing and is likely to be removed in the new regime.

The new framework proposes that small cars with engine capacities under 1200cc will form one section (category) with lower tax slabs, while those with bigger engines will belong to a separate category with higher duties. ‘Small cars’ will further be defined by a sub-4-meter length.

Making the deal more interesting, the new tax slabs will apply to motorcycles as well. Bikes with engine capacities less than 350cc will be taxed at 18% ( currently, these attract 28% ). Larger capacity motorcycles will continue to be taxed high.

Let’s try to understand this with an example. The Renault Kiger has a length of under 4 meters and comes with a 1.0L petrol engine. At present, this small SUV is priced in the range of Rs 6.15-11.23 Lakh, ex-showroom. It currently attracts a GST of 28%. With the revision in place, this will come down to just 18 percent. This will bring about notable reductions in pricing and is expected to boost demand in the entry-level segment.

In recent years, the small car and SUV sales in India have slowed down significantly. These made up one third of the total vehicles sold in the last fiscal year, showing a major dip compared to the pre-COVID era.

The slowdown has affected volume-based brands like Maruti Suzuki. Its market share dropped to 40% (from over 50%) in the last five years, following a drop in demand for the Alto, Dzire and Wagon-R. The proposed tax cut will be a great boon to these and the sales are likely to be revived.

28% is very high for budget-friendly models and to some extend, prevent manufacturers from pulling off extremely aggressive prices. This further makes finding value difficult for buyers, who are extremely sensitive to price and value propositions of these models.

The proposed revision, part of a programme announced by Prime Minister Narendra Modi since 2017, will bring about the much-needed rationalisation in taxes and lower the end prices.

Manufacturers like Hyundai and Tata Motors make extensive use of small capacity engines. Even the Nexon is powered by a 1.2L engine! These brands too are expected to benefit from the new regime.

Vehicles with bigger engines (bigger than 1200cc) will attract a GST of 40%. Now, these attract 28% in tax and an additional Cess of 1-22%. The revision may not benefit the models which are taxed at 28% and say have additional cess of 10%. But it will benefit those which attract 28% and 22%, making the combined figure 50 percent. The solid slab of 40 % will help bring down the prices of these.

Again, these are speculations for now. The government may rework the slabs for bigger cars. A luxury or premium car is a want more than a need. It is likely that government may even consider putting these under the ‘sin tax’ category.

If the proposal goes through, we expect the new regime to be announced by Diwali, which is considered a highly auspicious occasion for purchases. It is, in other words, India’s biggest shopping season. The common man will indeed benefit from this revision.