GST revs up to 40% for luxury cars and SUVs — but your wallet may still thank you

In a major reform, the Goods and Services Tax (GST) Council on September 3 approved a simpler two-slab system, reducing the structure to just 5% and 18% rates, while carving out a special slab of 40% for luxury and ‘sin’ goods. Finance Minister Nirmala Sitharaman announced the changes, which will come into effect from September 22, 2025, bringing sweeping implications for the automotive industry.

Luxury cars and SUVs

One of the most significant revisions relates to luxury cars and SUVs. Until now, these vehicles attracted 28% GST, but were also burdened with a compensation cess of 17–22%, pushing the total tax incidence to 45–50%. Under the new system, they will now fall into the 40% GST slab, but with no cess.

At first glance, the shift from 28% to 40% may look like a tax hike. However, the removal of cess means buyers of premium cars from brands such as Mercedes-Benz, BMW, and Audi will actually pay slightly less than before. For instance, a luxury car priced at ₹40 lakh earlier faced nearly 48% tax, taking the on-road price to about ₹59.2 lakh. With the flat 40% GST, the same car will now cost around ₹56 lakh—saving buyers over ₹3 lakh.

The revised slab also covers SUVs, multi-utility vehicles (MUVs), and MPVs with engines larger than 1,500 cc, length exceeding 4 metres, and ground clearance above 170 mm. These too will now be taxed at 40% without cess, making them more affordable than under the old system.

Small and mid-size cars

The Council has also eased taxation for smaller cars. Models previously taxed at 28% will now attract 18% GST, bringing substantial relief for budget-conscious buyers. This reduction is expected to stimulate demand in the mass-market passenger vehicle segment, which has been facing sluggish sales in recent months.

Commercial vehicles and auto parts

The new tax structure brings uniformity to the commercial vehicle segment as well. Buses, trucks, and ambulances will now be taxed at 18%, down from the earlier 28%. The same uniform rate applies to auto parts, which previously varied across different HS codes. Even three-wheelers have been brought under the 18% slab, ensuring consistency across categories.

Big bikes get costlier

While car buyers enjoy relief, the picture is less rosy for enthusiasts of big motorcycles. Bikes with engines over 350 cc—such as Royal Enfield cruisers and high-capacity imports—will now fall under the 40% GST slab. Earlier, these bikes attracted 28% GST plus a small cess of 3–5%, amounting to about 32%. Under the new regime, the overall tax rises sharply to 40%, pushing up prices.

Why the change matters

The earlier system was complex, with multiple slabs and varying cess rates that often confused both manufacturers and buyers. The new two-slab approach simplifies compliance, eliminates cess, and provides clearer pricing. For most buyers, the result is cheaper cars—especially in the luxury and mid-size categories. For the industry, the uniformity is expected to improve transparency and ease of doing business.

Importantly, the implementation date—September 22, 2025—coincides with the festive season, a critical period for automobile sales in India. By making cars more affordable, particularly in the mass and luxury segments, the Council hopes to boost demand and revive momentum in a sector that has been struggling with weak volumes.