India is considering a major reduction in Goods and Services Tax (GST) on small cars and insurance premiums. A government source confirmed the proposal on Monday, saying the move would be part of the biggest tax overhaul since 2017.
Under the plan, GST on small petrol and diesel cars may be lowered to 18% from the current 28%. Health and life insurance premiums could also be cut to 5% or even zero from the existing 18%. If approved, the new rates are expected to be announced before Diwali in October.
The proposal comes as sales of small cars have slowed in recent years. Many buyers in India have shifted to larger and feature-rich SUVs. According to industry data, small cars made up one-third of the 4.3 million passenger vehicles sold last year, compared to nearly half before the COVID-19 pandemic.
The tax cut is expected to provide significant relief to automakers. Maruti Suzuki, the country’s biggest carmaker, stands to benefit the most.
Its market share has declined to 40% from more than 50% over the past five years, largely due to falling sales of small cars such as Alto, Dzire, and Wagon-R. Rival companies like Hyundai Motor India and Tata Motors are also likely to gain.
Meanwhile, the government is discussing a special 40% GST rate for cars with higher engine capacity. These vehicles currently attract 28% GST plus an additional levy of up to 22%. The new rate would keep the overall tax burden for big cars between 43% and 50%.
News of the proposed cuts boosted the stock market. Shares of automakers, including Maruti, Mahindra & Mahindra, and Hero MotoCorp, rose between 2% and 8%. Insurance companies such as SBI Life and ICICI Prudential also gained 2% to 4%.
India introduced GST in 2017 to replace state-level taxes. However, the system faced criticism for its complexity, with four main tax brackets. The new plan aims to simplify the structure to two rates, 5% and 18%, with the final decision expected from the GST Council in October.
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