India Proposes Major GST Cuts on Small Cars and Insurance; Markets Rally

The proposed changes aim to reduce GST on small petrol and diesel vehicles from 28% to 18%, and bring down the tax on health and life insurance premiums from the current 18% to as low as 5%, or possibly even zero. These reforms, if approved, are expected to take effect from October and represent the most extensive revamp of GST since its implementation in 2017.

The announcement triggered a sharp rally in Indian stock markets. Shares of Maruti Suzuki, the country’s leading small car manufacturer, surged nearly 9%, driving a broader rally in auto and insurance stocks. Mahindra & Mahindra, Hero MotoCorp, and Bajaj Auto also posted gains between 2% and 4%. Insurance companies like ICICI Prudential, SBI Life, and LIC climbed as much as 5% before settling slightly lower.

The government is also considering scrapping the top GST rate of 28% and introducing a simplified two-tier system of 5% and 18%. However, "sin goods" such as tobacco and luxury products would face a higher 40% tax rate.

The reforms are pending approval from the GST Council, chaired by the Finance Minister and including representatives from all Indian states. The council is expected to meet in October to finalize the new tax structure.

Sales of small cars — those under 4 metres in length and with engine capacity below 1,200cc (petrol) or 1,500cc (diesel) — have declined in recent years as consumer preference shifted towards larger, feature-rich SUVs. Small cars accounted for just one-third of total passenger vehicle sales in FY2024, down from nearly 50% before the pandemic.

Maruti Suzuki, whose market share has dropped to 40% from over 50% five years ago, is set to be one of the biggest beneficiaries. Models like the Alto, Dzire, and Wagon-R could see renewed demand if prices drop. Other automakers such as Hyundai Motor India and Tata Motors are also expected to gain.

Maruti Chairman R.C. Bhargava welcomed the move, calling it a “huge reform” that could significantly improve vehicle affordability and increase consumer participation. “Tax rationalisation will enhance the competitiveness of Indian products, especially with open trade borders,” he said.

India’s insurance penetration remains low at 3.8% of GDP, according to Swiss Re Institute. Industry experts believe that lowering GST on premiums will help expand coverage and drive growth across health and life insurance segments.

While the tax cuts may strain government revenues, they are being seen as a politically savvy move that could enhance India’s global trade position and stimulate domestic consumption.

The Finance Ministry has not yet commented on the proposed changes.