Small cars are here to stay amid SUV-isation of India's car market, FADA says

The recent GST rate cut on small cars and a flat 40% on SUVs comes after more than two years of outsized demand for oversized cars.

India is no country for small cars? A dealers lobby doesn't think so.

The GST rate on cars has been reduced to 18% for small cars and 40% for SUVs.(Tushar Deep Singh/HT)

"This ‘SUV-isation’ of the industry is happening throughout the world. It is not because India has bad roads... It is going to be there for quite some time to come," CS Vigneshwar, president of the Federation of Automobile Dealers Associations told Press Trust of India.

But while SUVs give a purpose of comfort, style and safety, “hatches will have their own space because some people still want the hatches”, he said.

The recent GST rate cut on small cars and a flat 40% on SUVs, after more than two years of outsized demand for oversized cars, has sparked a debate on how India buys cars.

GST Rate On Cars

On 4 September, the GST Council reduced rates on hundreds of items—from soaps to small cars—to rationalise the indirect tax into two slabs (5% and 18%) from four (5%, 12%, 18% and 28%) earlier.

In the process, the GST Council also defined what a car is—small cars are less than 4 metres in length with a petrol engine smaller than 1,200 cc or a diesel engine smaller than 1,500 cc. Everything else is a big car.

Today, there are SUVs in every category and hatchbacks in one or two—every carmaker has offerings in every segment across body types, Vigneshwar said. “So, hatchbacks will exist, and SUVs will exist,” he said.

Small Cars vs SUVs

But “SUV-isation” of India's small-car market cannot be ignored.

Between FY19 and FY25, small car sales fell more than 60% to 1.44 lakh units from 3.7 lakh units. The overall passenger-vehicle market, during the same time, grew 28.5% to 43.38 lakh units from 33.77 lakh units.

While Maruti Suzuki India Ltd., which sells the highest number of small cars in the country, expects 10% growth in the segment due to the GST rate cut, rival Hyundai Motor India Ltd. feels micro-SUVs like its Exter and Tata Punch will grow at the cost of hatchbacks.

Maruti Suzuki vs Hyundai

A combination of factors—the income tax relief announced in Union Budget 2025, repo rate cuts by the Reserve Bank of India, and the GST rate cuts—will make small cars more affordable, thereby encouraging two-wheeler riders to upgrade, Partho Banerjee, senior executive officer (marketing & sales) at Maruti Suzuki, had said earlier. That would grow small-car sales by 10% and the overall car market by 7% in FY26.

On the flip side, Hyundai Motor India's Chief Operating Officer Tarun Garg believes that the recent GST rationalisation benefits not only small cars but also other segments of the car market.

“(The micro SUVs) Exter and Punch never existed four years back. The maximum sales are still in the ₹6-10 lakh segment,” he had said earlier.

“The only difference is that earlier, hatches used to sell there. Today, SUVs are selling there due to changing aspirations of customers… It is not as if suddenly, because GST has gone down, aspirations will die...”