GST Cut to 18% on Cars & Two-Wheelers: Impact on Auto Stocks

For investors following the Indian market, a major question emerged today: "Why did auto stocks like Mahindra & Mahindra, Eicher, and Maruti surge so dramatically?" The reason is a landmark overhaul of the Goods and Services Tax (GST) regime, which has significantly cut taxes on cars and two-wheelers. This move has sparked widespread optimism, with investors betting on a major revival in consumer demand just in time for the festive season. This guide explains the new tax structure, which companies are set to benefit the most, and what this means for the auto industry.

Table of Contents

1. What are the New GST Rates for Cars and Bikes?
2. How Did Auto Stocks React to the News?
3. Why This GST Overhaul is a Major Boost for the Auto Industry
4. Spotlight on a Key Beneficiary: Mahindra & Mahindra
5. Frequently Asked Questions (FAQs)

What are the New GST Rates for Cars and Bikes?

The GST Council has introduced sweeping reforms aimed at simplifying the tax structure and making vehicles more affordable. The new system replaces a complex multi-rate structure with two primary slabs of 5% and 18%, plus a 40% rate for luxury items. These new rates will be effective from September 22, 2025, strategically timed to coincide with the start of the Navratri festival.

Here’s a breakdown of the key changes for the automotive sector:

• Small Cars: Petrol cars under 1,200 cc and 4 metres, as well as diesel cars up to 1,500 cc, will now be taxed at 18%, down from the previous 28%.

• Two-Wheelers: Motorbikes with engines up to 350 cc will also see their GST rate cut from 28% to 18%.

• SUVs and Larger Vehicles: The tax on most SUVs and larger vehicles (engines over 1,200 cc or length over 4,000 mm) has been reduced to 40% from a previous range of 43-50%.

• Auto Parts: A uniform GST rate of 18% will now apply to all auto components, simplifying the supply chain for manufacturers.

How Did Auto Stocks React to the News?

The stock market’s reaction was swift and powerful, with the BSE Auto index climbing 1.70%. Investors rushed to buy auto stocks, anticipating that lower prices would directly translate into higher sales volumes.

Here are the standout performers from the rally:

• Mahindra & Mahindra (M&M): Emerged as the top gainer, with its shares surging nearly 5.95%.

• Eicher Motors: The parent company of Royal Enfield rallied 0.84% to a record high.

• TVS Motor Company: Shares climbed 0.97%.

• Hero MotoCorp: The two-wheeler giant saw its stock rise by 0.04%.

Why This GST Overhaul is a Major Boost for the Auto Industry

Market experts and analysts view these GST cuts as a major catalyst for the sector for several key reasons:

1. Significant Demand Increase: The tax reductions are expected to lead to a 5-10% increase in demand across different vehicle categories. The 10-percentage-point cut on two-wheelers and small cars, which form the bulk of the market, is particularly impactful.

2. Perfect Festive Timing: By implementing the changes just before the Navratri-Diwali festive season, the government is aiming to maximise the impact on consumer spending during the industry's most crucial sales period.

3. Increased Affordability: The direct price reduction will make vehicles more accessible to a wider range of consumers, potentially triggering a long-awaited demand inflection point.

4. Simplified Compliance: A more straightforward tax structure, especially the uniform 18% rate on auto parts, will reduce compliance burdens and improve operational efficiency for manufacturers.

Spotlight on a Key Beneficiary: Mahindra & Mahindra

Analysts have singled out Mahindra & Mahindra (M&M) as a primary beneficiary of these reforms. This is because approximately two-thirds of the company's vehicle portfolio, which is heavily skewed towards SUVs, will now fall into lower tax brackets. The significant reduction in taxes on its popular SUV models is expected to provide M&M with a strong competitive advantage and drive substantial sales growth, explaining why its stock saw the sharpest rally.

Frequently Asked Questions (FAQs)

Q1: Will cars and motorcycles become cheaper after this GST cut?
A1: Yes. The reduction in GST rates from 28% to 18% for small cars and most two-wheelers, and from over 43% to 40% for SUVs, is expected to be passed on to consumers, making vehicles more affordable. The new prices will be effective from September 22, 2025.

Q2: Which vehicle segment gets the biggest tax benefit?
A2: The small car and two-wheeler (up to 350 cc) segments receive the most significant tax cut, with the GST rate dropping by a full 10 percentage points from 28% to 18%. This is aimed at boosting the mass-market segment.

Q3: Why did Mahindra & Mahindra's stock rise so much?
A3: M&M's stock surged because its product portfolio, particularly its wide range of popular SUVs, is perfectly positioned to benefit from the new tax structure. With about two-thirds of its vehicles moving to lower tax brackets, investors anticipate a major boost in the company's sales and profitability.

Q4: Is this a good time to invest in auto stocks?
A4: The GST overhaul has created a very positive outlook for the auto sector, and many analysts see it as a structural growth driver. The timing ahead of the festive season is ideal for boosting sales. However, as with any investment, you should assess your own risk appetite and conduct thorough research before investing.

Q5: How will the uniform GST on auto parts help manufacturers?
A5: A uniform 18% GST rate on all auto parts simplifies the entire supply chain. It eliminates the complexity of dealing with multiple tax rates for different components, which streamlines accounting, reduces compliance costs, and improves overall manufacturing efficiency.