Big engines, bigger taxes: GST 2.0 hikes duty on luxury cars to 40%

The Goods and Services Tax (GST) overhaul announced by Prime Minister Narendra Modi last month is now officially in force, bringing major changes to India’s automobile taxation. Small petrol and diesel cars are set to benefit from rate cuts, but luxury vehicles and high-end electric cars will now face higher levies, reshaping costs for premium buyers.

Under the new rules, cars longer than four metres with petrol engines above 1,200cc or diesel engines above 1,500cc are classified as “luxury goods” and will attract a 40% GST.

The GST rate on all mid-size and large cars—defined as vehicles with engine capacity above 1500 cc or length exceeding 4000 mm—has been fixed at 40%. In addition, utility vehicles, irrespective of nomenclature—such as SUVs, MUVs, MPVs, or XUVs—with engine capacity over 1500 cc, length above 4000 mm, and ground clearance of 170 mm or more, will also attract a 40% GST rate without any cess.


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This adjustment means that while the headline GST rises sharply, the reduction in cess slightly moderates the net increase. Depending on engine size, fuel type, and body style, these larger vehicles will see a smaller overall tax revision compared with the steep cuts applied to sub-4m cars.

The GST changes are part of the transition to “GST 2.0,” a simplified two-slab system of 5% and 18%, with a special 40% slab reserved for sin and luxury goods. The reform also includes the planned abolition of the compensation cess, expected by October 31, which will simplify compliance for manufacturers and dealers.

How the old GST structure worked

Prior to the reform, all passenger vehicles except EVs were taxed at a uniform 28% GST, with an additional cess ranging from 1% to 22%, depending on engine size, fuel type, and body configuration. Electric vehicles alone benefited from a 5% GST.

Market impact

The GST reform is expected to boost sub-4m petrol and diesel car sales, offering relief to buyers during the festive season and reversing declines caused by rising prices and the growing popularity of used cars. Two-wheelers and compact vehicles are also likely to benefit from lower GST rates.

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Luxury and premium EVs, however, face higher taxes, which could slow growth in India’s high-end electric segment. Tesla, for instance, plans to ship only 350-500 units to India this year, despite its global scale, and BYD has sold 10,000 luxury EVs since 2021. The revised GST could further affect demand for these imported models.

Midsize and large vehicles, including traditional luxury cars, are less affected in net tax terms but will still feel the impact of higher headline GST.