India’s automotive sector is witnessing a pivotal transformation with the government’s comprehensive GST restructuring that came into effect on September 22, 2025. The new simplified three-slab structure of 5%, 18%, and 40% has eliminated the previous 28% slab and compensation cess system, creating ripple effects across the mobility landscape that industry leaders believe will reshape competition between conventional and electric vehicles.
The timing of this reform, coinciding with the festive season when automobile sales typically surge, has generated significant optimism among manufacturers and consumers alike. With 14 vehicle categories experiencing price reductions and only premium motorcycles above 350cc facing increases, the restructuring represents the most significant automotive tax reform since GST implementation.
Policy Stability Fuels EV Confidence
The government’s decision to retain the 5% GST on electric vehicles has been met with widespread industry approval. Uday Narang, Founder of Omega Seiki Pvt Ltd, emphasizes that this move “sends out a strong signal of policy stability and long-term commitment to clean mobility.” While acknowledging that reduced GST on ICE vehicles will create fresh competition, Narang points out that EVs still maintain a significant tax advantage over their petrol and diesel counterparts.
This advantage has become even more pronounced under the new structure. Premium electric vehicles now enjoy a substantial 35% tax differential compared to equivalent ICE vehicles (5% versus 40% GST), significantly enhancing their market competitiveness. When combined with road tax exemptions available in most states, this positioning strengthens the value proposition for electric mobility adoption.
The price impact data reveals the extent of these changes. Entry-level hatchbacks and compact vehicles are seeing the most dramatic reductions at 8.5%, while mid-segment vehicles benefit from 3.5% price cuts. Premium vehicles, previously burdened by compensation cess, now experience 6.7% price reductions. In the two-wheeler segment, most ICE motorcycles benefit from 7.8% price cuts, creating a more competitive landscape.
Manufacturing Sector Gains Predictability
For manufacturers, the continued 5% GST on EVs provides crucial cost structure predictability. “EV manufacturing requires high upfront capital in R&D, localisation, and battery technologies,” Narang explains. “Knowing that the tax regime remains stable allows companies like ours to plan for scale with confidence.” This stability is particularly valuable given the capital-intensive nature of electric vehicle production and the need for long-term investment planning in emerging technologies.
The reform extends significant benefits to the automotive aftermarket, with all components now unified under 18% GST, resulting in 7.8% price reductions for parts previously taxed at 28%. This simplification reduces complexity while making vehicle maintenance more affordable across all segments.
Investment Climate and Financial Ecosystem Response
The policy consistency demonstrated through GST retention for EVs is expected to attract increased foreign direct investment and domestic lending. Narang is confident that “global investors and domestic lenders look for policy consistency before committing capital to new industries.” The stable framework is anticipated to encourage Indian banks and NBFCs to extend more credit to both EV manufacturers and consumers, creating a virtuous cycle of growth and accessibility.
Industry projections for FY2026 suggest differentiated growth patterns, with passenger vehicles expected to see lower single-digit growth while two-wheelers may experience higher single-digit expansion. The commercial vehicle segment is projected to remain flat to marginally positive, while tractors continue showing momentum with 4-7% growth expectations.
The Battery Taxation Challenge
Despite the positive developments, significant challenges remain in the taxation framework. Chetan Maini, Co-founder and Chairman of SUN Mobility, highlights a critical inconsistency: “While EVs attract just 5% GST, standalone batteries are taxed at 18%, a mismatch that creates an inverted duty structure and adds to the cost of OEMs and infrastructure players.”
This disparity particularly impacts battery swapping and charging services, which are also taxed at 18%, making adoption expensive for gig workers, delivery riders, and fleet operators who are driving the transition. Maini argues that “rationalizing GST on standalone batteries, charging and swapping services to 5% would be a decisive step forward” to improve affordability and enable innovative models like Battery-as-a-Service.
Consumer Benefits and Market Dynamics
The ultimate beneficiaries of this restructuring are consumers, who now enjoy enhanced choice and competitive pricing. The dual impact of lower ICE vehicle costs and retained EV advantages creates healthy competition that pushes both traditional and clean mobility players to deliver superior value and technology.
As Narang concludes, “This will accelerate innovation, push both sectors to deliver greater value — and in the end, the real winner is the consumer.” The reform creates a more level playing field while maintaining incentives for sustainable mobility transition, positioning India to accelerate toward its ambitious clean mobility goals while fostering inclusive economic growth.
