Why GST Cuts Could Rev Up Auto Demand Even as US Tariffs Apply the Brakes

India’s auto industry stands at a crossroads. On the one hand, the government’s move to simplify and reduce GST rates on cars, auto parts, two-wheelers, and related goods is making vehicles more affordable, which could revive demand among buyers who have been holding off on purchases. Conversely, export pressures are growing: recent US tariffs on Indian auto components threaten to hurt margins and reduce competitiveness abroad. For both Indian consumers and manufacturers, there are gains and risks.

This article explores why GST cuts may act as a solid accelerator for domestic demand.

How GST Cut May Boost Demand?

Here is how the GST cut can impact the demand:

• Financing Cost Reduction

The Reserve Bank of India reduced the repo rate to 6.00% in August 2025, down from 6.50% in April. This has led to a 40–60 basis point reduction in auto loan interest rates across major banks. For a ₹10 lakh car loan over five years, this equates to a savings of ₹12,000–₹18,000 in interest payments. Combined with GST-led price cuts, the total affordability improvement ranges between ₹75,000–₹1.5 lakh, depending on the segment buyers. This dual stimulus is expected to push retail financing up in FY26.

• Revival of the Two-Wheeler Segment

Two-wheelers with engine capacities below 350cc, which constitute over 90% of domestic sales, now attract 18% GST instead of the previous 28%. This 10 percentage point reduction significantly lowers on-road prices for models like Hero Splendor, Honda Activa, and Bajaj Pulsar.

The segment had peaked in 2019 but saw a decline due to post-COVID inflation and muted income growth. With the revised tax structure, affordability improves, especially in rural markets, where two-wheelers are essential. Combined with festive season promotions and rural demand uptick, this reform is expected to restore volumes to pre-pandemic levels.

• Commercial Vehicle Demand

Commercial vehicles, including light trucks and agricultural transporters, now benefit from a unified GST rate of 18%, down from the earlier 28% plus cess. This reduction lowers acquisition costs for fleet operators and logistics firms.

Lower upfront costs improve fleet expansion viability and reduce freight rates, indirectly stimulating broader economic activity.

• Boost to Agricultural Mobility

Farm machinery and agricultural transport vehicles now attract 18% GST, down from the previous 28%. This 10 percentage point reduction directly benefits rural buyers and cooperatives.

With reduced tax burden, state governments can recalibrate subsidy schemes without clawback risks, enhancing the adoption of mechanised farming solutions and improving rural mobility for produce transport.

• Inventory Correction

Between 16-28 August 2025, vehicle registrations in India fell 8.27% year-on-year due to buyers deferring purchases in anticipation of GST cuts. However, this temporary dip is expected to reverse sharply post-GST implementation. Maruti Suzuki alone holds 1.5 lakh pending bookings and 48–50 days of inventory, indicating latent demand. Dealers expect a 20% month-on-month rebound in September and October, driven by the festive season and price clarity.

• US-China Trade Disruption

US tariffs on Chinese electric vehicles at 100% and auto parts at 25-50% have disrupted supply chains and doubled landed costs. Chinese imports worth $3.82 billion now face prohibitive duties, reducing their share in US auto imports to 1.7%. India, with $6.68 billion in car exports in 2023–24, is emerging as a viable alternative. Not only that, India’s EV battery and semiconductor ecosystem is being scaled under the PM E-Drive and Production Linked Incentive (PLI) schemes. This strategic shift positions India to absorb displaced global demand.

• EV Segment Stability

Electric vehicles continue to attract a 5% GST rate, unchanged under GST 2.0. This includes EV cars, two-wheelers, and charging infrastructure. Tata Motors leads with 36-38% market share in EVs, followed by Mahindra at around 25%. Between April and July 2025, EV sales reached 15,500 units. The PM E-Drive scheme offers a ₹5,000 per kWh subsidy in FY2025, further reducing acquisition cost. With ICE vehicles now taxed at 18–40%, the relative price advantage of EVs remains intact, supporting India’s clean mobility goals and reinforcing domestic EV manufacturing.

Risks and What Could Prevent Demand from Rising Enough

While GST cuts are promising, some risks and constraints could limit how much demand actually picks up.

• Sometimes, even when the tax is cut, manufacturers or dealers may not reduce prices fully, citing material cost increases, logistics, or other overheads.

• If loan rates, down payment requirements remain high, affordability may still be constrained despite tax cuts.

• Supply bottlenecks are another risk factor. Production capacity, semiconductor/parts availability, and logistics issues could limit how many cars can actually be delivered.

• Consumer sentiments, for example, if people expect further drops, say in EV incentives, or future tax changes, they might delay purchase again.

• Fuel prices, inflation, oil import costs, and global commodity prices, which affect input costs, could negate some of the price benefits.

Conclusion

For retail traders and investors, the GST cuts offer a clear demand-side boost that cannot be overlooked. Lower tax rates on cars, two-wheelers, commercial vehicles, and farm machinery are set to lift sales volumes across both urban and rural markets. This creates a favourable cycle for auto manufacturers, dealerships, and financing companies, signalling revenue expansion and improved earnings visibility in FY26.

Reduced loan rates further strengthen affordability, pointing towards higher retail credit growth. While US tariffs pose export risks, domestic demand remains the more stable driver in the near term. Investors should track inventory correction trends and festive season sales momentum, as these will be early indicators of sector strength.

Read more:

GST 2.0 vs Current GST: A Breakdown of What’s Changing
GST Reform: How India’s Two-Slab GST System Could Reshape Consumption and Compliance

Sources

NDTV
The Economic Times
The Hindu
HT Auto
CARHP
Fortune Business Insights
Export Import Data
Auto Car India
E-Vehicle Info
ClearTax