India plans major GST reform to cut taxes on small cars and insurance

In response to tariffs exceeding 50% announced by US President Donald Trump, India’s Narendra Modi administration has unveiled its most significant tax reform plans since 2017.

India aims to reduce taxes on small cars and insurance premiums through a comprehensive reform of its Goods and Services Tax (GST). Prime Minister Narendra Modi’s plan has triggered a rally in the stock markets, with government sources announcing the information on Monday.

Upon the reform’s approval, product prices are expected to fall starting in October, with consumers, automobile manufacturers, and insurance companies emerging as the primary beneficiaries.

A source directly involved with the matter told Reuters that the federal government has proposed reducing the GST on small petrol and diesel cars from the current 28% to 18%. The same source indicated that the GST on health and life insurance premiums could also be lowered from the current 18% to 5% or even zero.

Indian markets rose on Monday, and the Nifty index experienced its best day in three months with a 1.3% increase. Automobile stocks also surged.

In a note, Jefferies equity analyst Mahesh Nandurkar stated that the tax cuts would “increase affordability, boost consumption, and make essential and aspirational goods more accessible to a wider population.”

“Maruti (Suzuki) should be the biggest beneficiary of this potential reduction,” he added.

Modi’s significant tax cuts will strain government revenues but are being praised by business and political commentators, who say they will strengthen his image in the ongoing trade war with Washington.

Federal government officials announced over the weekend that New Delhi has proposed only two tax rates in the renewed structure: 5% and 18%. The highest 28% slab will be abolished.

However, the new proposal will apply a 40% tax to 5-7 “sin goods,” such as tobacco products and luxury items.

This announcement will take effect upon approval by the GST Council, which is chaired by the federal finance minister and includes representatives from all states. The meeting is expected to take place in October.

The source said that high-engine-capacity cars, currently subject to 28% GST and an additional tax of up to 22% for a total of approximately 50%, could be subject to a new special tax rate of 40%.

The government source also added that it is being considered whether an additional tax will be applied on top of the 40% to keep the total tax rate for large cars constant between 43-50%.