GST 2.0, customs reliefs, Indo-Japan FTA to reshape future trajectory of India’s $74 billion auto component industry: Grant Thornton Bharat

The rollout of GST 2.0, custom exemptions on EV components, and the India-Japan CEPA are going to reshape the competitiveness and the future trajectory of India’s $74 billion automotive component industry, according to a new report titled “Navigating Change: GST 2.0, customs and FTA impacts on the India-Japan auto sector”, unveiled by Grant Thornton Bharat on Monday.

Backed by $43.3 billion in cumulative investments by Japan—making it India’s fifth-largest foreign investor—the paper provides a comprehensive analysis of India’s evolving regulatory environment, examining how GST 2.0 reforms, customs duty changes, and the Indo-Japan Free Trade Agreement (CEPA) are collectively redefining India’s auto component ecosystem.

“The convergence of GST 2.0 and targeted customs incentives marks a defining moment for India’s automotive sector. Reduced tax rates, simplified compliance, and supply-chain-focused exemptions will not only elevate India’s cost competitiveness but also strengthen its positioning as a manufacturing and export hub for Japanese automakers,” said Sohrab Bararia, partner, India Investment Advisory, Grant Thornton Bharat, in a statement.

The revision of GST rates marked an epochal shift for India’s automotive sector, streamlining tax structures, enhancing affordability, and catalysing consumer demand across segments. Under the revised GST tax structure, small cars and motorcycles with an engine capacity of 350cc or less now attract 18% GST, down from 28% plus cess. It has led to price reductions of up to ₹1 lakh on select models. Premium vehicles, on the other hand—both SUVs and high-end motorcycles—now face a flat 40% GST rate. On the other hand, electric vehicles continue to benefit from 5% GST.

In the aftermath of the rate changes, the auto component industry recorded a sharp surge in customer curiousity and interest, with booking volumes rising by nearly 50% in the small car segment. The GST reforms were complemented by measures announced in the Union Budget 2025, which boosted the EV sector by balancing supply and demand incentives. Customs duty exemptions on lithium-ion battery scrap and critical minerals such as lead and copper aim to secure raw materials and generate employment.

“Additional exemptions on capital goods for battery manufacturing further support the ecosystem, while tariff reductions on motorcycles and CKD/SKD units of large vehicles enhance affordability and competitiveness in line with the Atmanirbhar Bharat vision. The report indicates that this regulatory reset will accelerate investment flows, promote EV adoption, and drive the next wave of Indo–Japan collaboration in clean mobility and advanced manufacturing”, adds Saket Mehra, Partner, Auto & EV Industry Leader, Grant Thornton Bharat.

The India–Japan CEPA and the India–Japan Digital Partnership (IJDP) are fostering innovation in electric vehicles, connected cars, and AI-based manufacturing. Meanwhile, efforts like the Supply Chain Resilience Initiative (SCRI) aim to localise key components and diversify sourcing. Through the Japan-India Institute for Manufacturing (JIM) and Japanese Endowed Courses (JEC), more than 30,000 Indian engineers are being trained to meet Japanese manufacturing standards, building a skilled workforce for advanced automotive production.