Planning on buying a small car or an insurance policy? Then, you might want to hold off a little while. India might be ready with a major tax reform, and if everything goes according to plan, prices for a majority of items, especially small cars and insurance could possibly fall after October. This might be the biggest change the tax system is going through in recent times and would be of real help to the common man. This is a huge step! Let us now go into what is happening and what it means for you, and how it will impact the overall market.
What’s the Government’s Intent?
The Indian government is expected to do a major overhaul of the Goods and Services Tax (GST) system. In order to lessen the multiple taxes that were in place earlier across states the tax was brought into force in July 2017. However, with time, it has again started becoming very complicated, with so many tax rates. The present system has many tax slabs — 0%, 5%, 12%, 18%, and 28%. Further, certain items attract an additional “cess” over and above GST like cars, cigarettes, and luxury goods.
The government now intends to simplify the GST further. Removing the 28% tax bracket entirely will accommodate only two GST rates of 5% and 18%. Another special rate of 40% will be levied on select luxury items and “sin” goods- tobacco, alcohol, and costly vehicles.
What all Will Get Cheaper?
This is likely to be a big relief for buyers of small cars, two-wheelers, and insurance. Let us look at the key areas that will benefit:
- Small Petrol and Diesel Cars: Currently, the cars bring in a 28% GST plus a cess of 1% to 3%. As per the plan, the GST should ideally come down to 18% with no cess. This can substantially bring down the prices of small cars and make them affordable to the middle class.
- Two-wheelers below 350cc: These two-wheelers with their engine sizes under 350cc currently attract a 28% tax. Under the new plan, this may be reduced to 18%, helping millions of workers on a daily basis who rely on these bikes and scooters.
- Health and Life Insurance: As of now, insurance premiums incur a tax of 18%. In this case, the tax is pretty high and discourages many people from buying insurance. The government is planning to reduce GST on these premiums to 5%, or potentially 0%.
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What Will Remain the Same?
Some might stay expensive or even get a little pricier. What about SUVs with big engine capacities and very luxurious cars? These, under the new tax rate of 40%, are an attraction. Presently, these are under 28% GST rate, plus a cess that might go up to 22%, so almost equal to 50% tax. Mid-sized cars could also get a lesser tax as compared to now. Say, for instance, vehicles with an engine size just above that of a small and compact car like 1300cc or 1600cc currently have a 43% tax (28% GST + 15% cess) levied on them. Under the new scheme, these vehicles could go down to 40%, giving some relief to the buyers.
Who Will Benefit the Most?
This new reform might be a great advantage for car buyers, insurance customers, and manufacturers. Here’s how:
- Car Buyers: People invested in buying, will earn big on savings on lower end and entry-level hatchbacks, compact sedans, or mini SUVs. With a lower tax, on-road prices of these vehicles get slashed. And that itself might bring a lot of middle-class families within the range of being able to afford a car.
- Two-Wheeler Buyers: Millions in India use motorcycles & scooters as their primary mode of transport. GST will reduce costs and entice more people to transition from public transport/walking to personal vehicles.
- Health and Life Insurance: Insurance may be important (necessary), but many intentionally procrastinate purchasing quality coverage because of its cost. Reducing or eliminating the GST will allow these policies to be cheaper and possibly allow more people to become insured.
- Auto Manufacturers: These companies (Maruti Suzuki, Tata Motors, Hyundai.) sell small cars in great numbers, so they will benefit the most. In recent years, however, the sales of small cars began to wane as buyers opted for larger and more feature loaded SUVs. If the price of small cars declines, demand may return, and some of the market share that has been lost can be recouped.
Here’s a quick insight into how the GST proposal may impact various vehicle types and insurance:
| Item | Current GST Rate | Proposed GST Rate | Impact |
| Small Cars (under 1200cc) | 28% + 1–3% cess | 18% | Significant price drop |
| Motorcycles (under 350cc) | 28% | 18% | Lower costs for daily commuters |
| Mid-size Cars | 43% (28% + 15% cess) | 40% | Small tax relief |
| Luxury Cars/SUVs (above 1500cc) | Up to 50% | 40% + possible levies | Likely same or slightly more |
| Health/Life Insurance | 18% | 5% or 0% | Premiums could fall sharply |
Impact on the Automobile Sector
The reduction in GST would be very beneficial for the automobile sector, especially as it pertains to manufacturers of affordable and small vehicles. Current taxes on small cars and two-wheeled vehicles range from 28% or more.Reduce of taxes might lower the prices of these vehicles and help with affordable transportation. Car companies such as Maruti Suzuki, Tata, and Hyundai can increase their sales of automobiles to middle-class families. Increased demand from customers would mean factories would have to work harder, possibly creating more jobs, which could potentially stimulate the automobile industry. So with a reduction in GST we could help car buyers and automobile manufacturers.
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What Does this Indicate for the Economy?
The government is not only relieving consumers financially. This action is also smart economics. By reducing taxes on basic and aspirational goods, it is looking to improve consumption. The more consumers spend, the more companies will produce. This leads to more jobs and expands the economy. While this tax reduction could reduce government revenue, the goal is that the increase in consumption will more than compensate. Lower prices for vehicles and insurance could also formalize more of the economy including in rural and semi-urban areas where affordability is an important issue.
The stock markets have already begun to react to this. The day the news occurred, auto and insurance stocks rose, and the Nifty 50 index had one of its best days in many months. Investors seem to recognize the possibility that this could lead to a further increase in sales, profits, and the overall market.
When Will These Changes Happen?
The new GST framework will be deliberated at an upcoming GST Council deliberative meeting in October. The GST Council comprises of the Finance Minister and respective finance officials from all states. If the proposal passes the deliberation, the new rates may be adopted immediately following the GST Council, just in time for another festive season involving significant purchase activity. The timing of the proposed change is no coincidence. The government is looking to take advantage of Diwali and other festival events that involve the buying of vehicles, insurance purchases, and broader purchase activity. Tax-relief incentives can have an impact on the growing economy and the demand to make essential products as affordable as the largest shopping season for most India consumers.
Finally
If this GST reform gets approved, it might be one of the most consumer-friendly decisions made by the Indian government for a long time. It won’t just relieve buyers financially, but it will also affect industries like the automobile and insurance. It may mean that more people now can step up and buy a car or get life and health insurance, things that would have been out of reach for many. If you’re looking to buy a vehicle or insurance policy, you might want to wait till after the October GST Council meeting. A little patience may be worth a whole lot of money.
