The govt wants you to fall in love with hatchbacks again

The GST Council on Wednesday approved a new tax structure for automobiles, fixing the rate for big cars at 40% and cutting levies on small cars and motorcycles up to 350cc to 18%.

Revenue Secretary Arvind Shrivastava also said that the tax rate on electric vehicles will remain unchanged at 5%.
The revision comes as SUV sales, the dominant segment in India’s passenger vehicle market, recorded their first monthly decline in more than five years. Officials said the new tax regime is designed to encourage compact cars and two-wheelers, segments that have lost ground during a decade-long surge in SUV demand.

SUV sales show first slowdown in years
According to industry data, monthly SUV sales fell 2.1% year-on-year to about 1.75 lakh units in June. This is the first instance of a decline since the pandemic and comes after years of sustained double-digit growth. SUVs today make up about 55% of all passenger vehicles sold, up sharply from 14.3% in FY15.

An industry executive told ET in August, “SUV sales dropped for the first time since the pandemic this June. In fact, for the first time in many years, SUV sales grew in modest single digits in the first quarter of FY26.”

In Q1 FY26, SUV sales rose just 5.6% to 5.72 lakh units, compared with an 11.3% rise in FY25. In earlier years, growth was much stronger — 42% in FY22, 36% in FY23 and 27% in FY24.

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Ravi Bhatia, president at automotive consultancy Jato Dynamics, confirmed the shift. “Monthly sales data for 2025 reveals a marked and consistent decline in SUV sales between January and June. This appears to be the first prolonged downturn in SUV demand since the pandemic, possibly driven by economic uncertainty, rising fuel costs and changing buyer sentiment,” he told ET.

Market share at risk of plateauing
Even in FY20, when passenger vehicle sales declined 18%, SUVs dropped by just 7%, strengthening their market share. But in June 2025, passenger vehicle sales as a whole fell 7% while SUVs dropped 2%, reducing that historic gap. “Now even this differential … has started coming down, hinting that the segment may be plateauing. We have to watch over the next few quarters if the share of SUVs in PV sales grows further or has bottomed out,” an industry executive told ET in August.

Data also showed a difference within the category: luxury SUVs sold about 3,660 units in June, while non-luxury models sold 1.71 lakh units. In developed markets, SUVs typically account for 60% of new car sales, a level India is now approaching.

At the same time, executives noted to ET that demand for multi-purpose vehicles (MPVs) is picking up, suggesting buyers may be shifting preferences within the broader passenger vehicle market.

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Carmakers eye festive revival

Despite slowing growth, carmakers remain optimistic about upcoming launches. “Our focused product interventions since June 2022 have resulted in a 75% increase in the SUV market share: From around 12% in FY23 to approximately 21% in FY24 and FY25,” said Partho Banerjee, senior executive officer for marketing and sales at Maruti Suzuki, in an interaction with ET in August.

Mahindra & Mahindra is also betting on new models. “Mahindra has projected a target growth of mid-to-high teens for its SUV segment in FY26,” said Nalinikanth Gollagunta, chief executive of the automotive division at M&M, speaking to ET in August. The company plans multiple battery electric and fossil fuel-powered SUVs to sustain momentum.

With the festive season ahead and tax changes in place, the market will now test whether lower GST on hatchbacks and two-wheelers can revive demand in segments that once dominated Indian roads.