GOI’s GST Cuts Unlock New Opportunities for the Auto Sector

The Indian government’s GST reforms, effective September 22, 2025, reduce GST rates from 28% to 18% for small cars, two-wheelers up to 350 cc, three-wheelers, and commercial vehicles, while unifying the GST rate on auto components at 18%. This reform boosts affordability and demand, aligning with the “Make in India” vision, but the growth payoff depends on how the industry resolves working-capital constraints across OEMs, dealers, and MSME suppliers. Furthermore, navigating both the opportunities and systemic challenges will determine whether these GST reforms can drive sustainable growth.

What the Data Indicates from the GOI’s GST Reforms

Why it matters This tax cut lowers vehicle cost, spurring demand amidst sales, but OEM profitability and supplier liquidity remain key challenges for sustained growth. Supply chain issues, including component shortages, raw material shortages, and labor scarcity, threaten production capacity amid rising surges. 

• Affordability Gains Fuel Consumer Demand-GST on small cars and two-wheelers has been cut from 28% to 18%, prompting OEMs like Honda and Tata to announce price reductions up to ₹1.5 lakh, boosting demand prospects. 
• Margin Pressures Limit OEM Flexibility-OEM margins declined to about 5.4% in Q1-2025 (over 40% below 2021 peaks), limiting the scope to extend supplier credit during input-price swings.
• Demand Signs the Need for Market Stimulus-Passenger vehicle sales reportedly declined by up to 9% in August 2025, which underscores the market’s need for stimulus to revive demand.
• Auto-Component Sector Under Strain-India’s auto-component industry turnover reached ₹6.73 lakh crore in FY25, while MSME tiers remain exposed to delayed receivables. These liquidity constraints pose risks to production continuity despite GST-driven growth.
• Scope for Sustained Growth-Long-term growth depends on improving OEM profitability and ensuring timely payments to MSME suppliers to maintain supply chain stability and capitalise on increased demand.

Demand Surge Expected

Tax cuts improve price competitiveness for first-time buyers and rural consumers, encouraging growth in passenger vehicles and two-wheelers. MSMEs benefit from reduced input costs and potential employment opportunities. MSME suppliers stand to benefit from reduced input costs and greater employment opportunities. Multiple OEMs have publicly passed on GST benefits, signaling a push to stimulate festive-season demand. For example, Honda’s revised prices for popular models signal market optimism in the industry.

The Operational Challenges in the Industry

Despite the opportunities created by GST reforms, the sector faces several pressing challenges. Reduced GST rates may lead to short-term revenue shortfalls for both the Centre and States for those reliant on luxury vehicle cess. Lower vehicle prices could increase private ownership, worsening congestion and pollution unless paired with stronger planning and transport investment. Finally, affordability is constrained by high financing costs, limiting access for rural and first-time buyers.

Liquidity and Working Capital Constraints in the Auto Sector

While GST cuts reduce purchase prices and input costs, liquidity challenges exist at multiple levels of the supply chain.

• For OEMs: Operating margins falling to 5.4% in Q1 2025, a significant 40% decline from 2021 largely due to softening demand, rising raw material costs, and the strain of EV production.Thin margins reduce the ability to extend favorable payment terms when component costs are volatile and cash flow cycles are stretched.
• For Dealers: Consumer demand, high financing costs, and growing inventory backlogs have put a strain on dealer cash flows. Many dealers have been forced to rely on high-interest loans to finance unsold vehicles, and some are even reporting cash flow issues that impact daily operations.
• For MSMEs: The auto component industry, valued at ₹6.73 lakh crore in FY 2024-25 relies heavily on timely payments. However, delayed receivables from OEMs and tier-1 suppliers and payment delays with DSO (Days Sales Outstanding) stretching up to 60 days for many Tier-2 and Tier-3 suppliers, makes it difficult to manage working capital. 

TReDS bridging Policy Reforms with Supply Chain Stability 

The Trade Receivables Discounting System (TReDS), regulated by the Reserve Bank of India, is a digital platform where approved invoices are competitively discounted by financiers. Suppliers get paid early and buyers settle with financiers on due dates without changing payment terms. Users of TReDS platforms report material improvements in working-capital cycles via case studies, particularly among small auto suppliers. Government initiatives lowering turnover thresholds for TReDS onboarding aim to expand these benefits further. Strengthening supplier relationships also contributes to broader financial inclusion.

The GST 2.0 is a transformative shift toward reviving India’s automotive sector through lower taxes and increased affordability. However, long-term success depends on addressing liquidity constraints and leveraging TReDS platforms like DTX by KredX to unlock sustainable growth across OEMs, dealers, MSMEs, and the wider supply chain effectively.

Reform Is Just the Beginning

GST 2.0 represents a critical step in reviving India’s automotive sector, improving affordability for consumers, and providing demand stimulus. But its long-term success will depend on how well the industry addresses systemic liquidity constraints within the supply chain, leveraging TReDS platforms, leading to sustainable growth across India’s auto industry.