GST rate cut on ICE vehicles to prolong price disparity with EVs, say experts

The Goods and Services Tax (GST) rate cut on internal-combustion engine vehicles to two slabs of 18% and 40% is set to prolong their price disparity with electric vehicles (EVs), industry experts told Fortune India.

The impact on price disparity would be much more pronounced in the entry-level EV segment, where customers are value-conscious.

Following the GST rate rationalisation, small cars up to 4 metres in length will be taxed at a flat rate of 18% compared with 31% (including cess) earlier, while mid- and large-sized cars with a length of over 4 metres will be taxed at a uniform rate of 40% as against 43%-50% (including cess) earlier. GST on EVs continues at 5%.

The entry-level EV segment, which Tata Motors started with the hatchback Tiago EV and then continued with the Punch EV, could see some impact, said Puneet Gupta, Director of India & ASEAN, S&P Global Mobility. “These customers are value-conscious, and they look for price parity between EVs and ICE. This segment, which will definitely get impacted, because now CNG vehicles will provide a better value proposition rather than EVs,” said Gupta. “In the entry EV segment, there will be an impact due to the GST rate cut on ICE vehicles, and it will slow down, to some extent, the sales of entry EVs.”

While the Tiago EV is available at prices starting from ₹7.99 lakh (ex-showroom), the ICE Tiago, which costs roughly ₹5 lakh, will see its price come down by up to ₹75,000 from September 22, 2025.

India needs more electric cars at mass-market price points to drive EV penetration to 20% by 2030, according to a report by Bain & Company.

"The GST rate cut for ICE vehicles is likely to prolong the timeline for price parity with EVs, especially in the entry-level car segment. With prices of entry level cars expected to decline by 8-10% following the reduction in GST rates, even as EVs retain their lower tax rate, the reduction for ICE vehicles tilts affordability in their favour, potentially slowing EV momentum in the near term. Notwithstanding the same, stronger incentives or cost reductions in EV manufacturing (led by reduction in battery prices) would continue to influence the upfront price gap between EVs and ICE and will be a key monitorable," said Rohan Kanwar Gupta, Vice President and Sector Head, Corporate Ratings, ICRA.

While GST on all electric vehicles (EVs) has been retained at 5%, the reduction in GST rates on ICE vehicles has diminished the large tax arbitrage that so far existed between ICE and EV, said Saurabh Kanchan, Partner, Deloitte India. “That said, the arbitrage is still significant in favour of EVs, especially in the bigger and luxury car segments,” he added.

Poonam Upadhyay, Director at Crisil Ratings, said that in the near term, the GST rate cut on ICE vehicles may slow down the adoption of electric cars, particularly compact and mid-priced SUVs that often serve as a second car in urban households. “Effective September 22, 2025, the Goods and Services Tax (GST) on small internal combustion engine (ICE) passenger vehicles (PVs) will decrease from the current 28% plus cess to 18%. This reduction will result in a price decrease of at least ₹30,000–60,000, depending on the model. Currently, the entry-level compact ICE sports utility vehicle (SUV) is about ₹3.8 lakh cheaper than a comparable entry-level electric SUV. With the tax cut, this price gap will widen, making electric PVs less attractive,” Upadhyay said.

Upadhyay, however, said that falling battery prices, lower running costs, supportive government policies, rapid rollout of charging infrastructure, and new model launches will continue to drive demand for electric cars over the medium term.

According to S&P Global Mobility’s Gupta, the premium segment will not see much impact. “In the premium segment, there will be an impact in terms of price parity, but it will be limited as consumers in this segment want to buy a cleaner car.”

According to Gupta, automakers need to calibrate the number of tech features in entry EVs to drive down prices. “OEMs need to understand what they can offer in the entry segment. Do high-tech features make sense in entry-level cars? They can take out some features and make it more affordable. Companies have to aggressively take on localisation and improve affordability by financing options such as BAAS,” he said.

Deloitte’s Kanchan said the EV segment continues to face working capital strain on account of tax inversion, with parts and components at 18% even though the manufactured EV is at 5%.