Mumbai, Aug 18 : In the upcoming Goods and Services Tax (GST) rate rationalisation, the Centre is expected to lower the tax on passenger vehicles (PVs) and two-wheelers, making them more affordable ahead of Diwali.

The Finance Ministry has sent its proposal to the GST Council for two GST rates of 5 per cent and 18 per cent across all goods, which will replace the existing four slab structure. The GST Council, comprising state finance ministers, is expected to meet in September to approve the proposal.

Currently, all passenger vehicles are subject to a GST of 28 per cent plus a compensation cess of 1 per cent to 22 per cent based on engine capacity, length, and body type, raising the total tax payable to as much as 50 per cent. Electric cars are taxed at 5 per cent with no compensation cess.

The GST for two-wheelers is 28 per cent. There is no compensation cess for models with an engine capacity up to 350cc, and a 3 per cent cess for those over 350cc.

The revised GST structure is expected to eliminate the 12 per cent and 28 per cent slabs, benefiting mass-market cars and two-wheelers. Some sin goods, such as luxury cars, however, may be subject to a 40 per cent tax.

Prime Minister Narendra Modi has announced that citizens will receive a double bonus this Diwali through a planned GST reform aimed at reducing prices of goods and services for the poor and middle class.

"We are coming with the next generation of GST reforms, which will be a gift for you this Diwali. Taxes needed by the common man will be reduced substantially, and many facilities will be increased. Our MSMEs, our small entrepreneurs, will get a huge benefit. Everyday items will become very cheap and that will also give a new boost to the economy," PM Modi added.

The GST reduction will benefit entry-level models in the PV and two-wheeler segments, which have faced challenges from higher acquisition costs and rising interest rates. Original equipment manufacturers (OEMs) had cited increased input costs and regulatory changes, including mandatory safety features and updated emission standards, as reasons for the rise in entry-level model prices.

Senior executives of Maruti Suzuki India, Hero MotoCorp and other industrial bodies had advocated for tax reforms to boost small car sales. Many of them had advocated for a drop from 28 per cent to 18 per cent drop in GST to promote affordability, sales, and manufacturing growth. The Nifty Auto index had jumped 4.61 per cent as of 10.35 am on expectations of a GST rate cut.

/IANS