GST 2.0 on Cars: The 18%/40% Split

Imagine trying to price a car when the tax on it depended on a whole separate cess layered on top of the base tax, with the cess itself varying by engine size, fuel type, ground clearance and vehicle length, several extra variables a buyer had to untangle just to understand the final on-road price. That was genuinely how car taxation worked in India for years, 28% GST plus a compensation cess ranging anywhere from 1% on small cars to 22% on the largest luxury SUVs.

The GST 2.0 reform, rolled out through 2025, scrapped that compensation cess entirely and replaced the whole structure with essentially two flat slabs, small cars, defined as petrol engines up to 1200cc or diesel up to 1500cc with length under 4000mm, including compact SUVs and hybrids within those limits, now attract 18% GST, while larger and higher-end cars and SUVs, most full-size SUVs among them, attract a flat 40%, with electric vehicles kept at a concessional 5% regardless of size.

For a luxury SUV that previously carried 28% GST plus a 20-22% cess, effectively pushing total tax close to 50%, the new flat 40% rate actually works out to real savings, 8 to 10 percent lower total tax, while the reform's clearer purpose becomes visible in the EV rate, a fully electric SUV, however large, still pays only 5%, an enormous, deliberate gap against the 40% a similarly sized petrol or diesel SUV now pays.

This is why the size of that 18/40/5 gap, not just the headline reform itself, is what actually matters for reading the industry's direction, it tells you exactly how much financial incentive the tax system is now building into every buyer's choice between a small car, a large SUV, and an EV, a gap wide enough that it will keep showing up in Indian carmakers' product and pricing strategy for years.