Crisil Ratings : GST cut a 200 bps volume upshift for two-wheelers, 100 bps for PVs

Two-wheeler sales volume to grow 5-6% this fiscal, that of PVs 2-3%

The Goods and Services Tax Council's decision to move to a two-rate structure of 5% and 18%, effective September 22, 2025, is a timely move that will revive demand for automobiles.

Two-wheelers and passenger vehicles (PVs), which together account for 90% of the domestic automobile industry's volume, are expected to see demand increase ~200 basis points (bps) and ~100 bps, respectively.

As a result, two-wheeler sales volume is expected to grow 5-6% this fiscal, while that of PVs may rise 2-3%.

Sales of two-wheelers had slumped in the first quarter of this fiscal, especially entry-level commuter models, amid regulatory disruptions from the On-Board Diagnostics II, or OBD2, implementation and the early and heavy onset of the southwest monsoon, which temporarily disrupted rural activity and dampened demand.

PV and small car sales also slowed in June-August 2025 because of affordability issues, shortage of rare-earth minerals and deferral of purchases in anticipation of the GST rate cuts.

Beyond demand revival, simplified slabs will also streamline compliance and lower logistics costs through smoother interstate taxation, supporting profitability across the value chain.

Says Anuj Sethi, Senior Director, Crisil Ratings, "With the GST cut fully passed on, vehicle prices are expected to drop 5-10% (Rs 30,000-60,000 on small PVs; Rs 3,000-7,000 on two-wheelers). With the rate cut coinciding with the Navratri and the festive season, sentiment would get a timely boost. Coupled with new launches, softer interest rates and improved affordability, this should drive a stronger second half for the automobile sector."

Under the revised GST structure, rates on small PVs1, two-wheelers up to 350 cc (nearly 90% of the segment sales), commercial vehicles (CVs) and three-wheelers will drop to 18% from 28%.

Mid- and larger PVs will also see a 3-7% cut, while tractors will benefit from a reduction to 5% and 18% from 12% and 28%, respectively.

For CVs, the lower GST should offset the cost push from the mandatory AC cabin requirement from October 1, 2025.

In contrast, motorcycles above 350 cc will face a higher levy, moving to a 40% special rate, compared with the current 31%, including compensation cess, making them costlier.

Says Poonam Upadhyay, Director, Crisil Ratings, "Higher volume will improve capacity utilisation and operating leverage, translating to stronger cash flows and healthier margins for automakers, reinforcing their already stable credit profiles. On the distribution side, elevated PV inventory of 50-55 days should ease after the GST cut. Even a modest recovery in PV demand will aid inventory correction, ease working capital pressures and support dealer cash flows."

One of the factors to watch will be how the unutilised tax credits affect dealers' working capital during the festive season.

Source : Equity Bulls

Keywords

CRISILRatings INE007A01025 GSTCut TwoWheelers