The GST 2.0 Reform and Its Impact on India’s ICE and EV Automotive Sectors

India’s GST 2.0 reform, implemented in 2025, has recalibrated the automotive sector’s trajectory, creating a stark divergence between internal combustion engine (ICE) and electric vehicle (EV) markets. By slashing GST on mainstream ICE vehicles and components from 28%-31% to 18%, the government has made small cars, two-wheelers, and three-wheelers more affordable, while maintaining a 5% tax on EVs to incentivize sustainable mobility [1]. This dual approach has triggered a recalibration of consumer demand, automaker strategies, and investor sentiment, with profound implications for long-term positioning in India’s auto sector.

ICE Sector: Affordability Surge and Price Wars

The GST 2.0 cut has directly boosted ICE affordability, particularly for mass-market vehicles. For instance, Tata Motors, Mahindra & Mahindra, and Hyundai reduced prices by ₹1.01 lakh to ₹2.4 lakh across their ICE portfolios, with Maruti Suzuki’s WagonR seeing a potential ₹52,000 price drop [2]. This has spurred demand in urban and semi-urban markets, where price sensitivity dominates. According to a report by The Economic Times, the Nifty Auto index surged 4.6% post-reform, reflecting investor optimism about ICE revival [3].

However, this affordability boost comes at a cost for EVs. The 18% GST on ICE vehicles narrows the price gap with EVs, which remain at 5%, potentially slowing EV adoption. For example, a mid-sized ICE hatchback now costs roughly 20% less than its EV counterpart, a margin that could deter budget-conscious buyers [4]. Automakers like TVS Motor and JSW MG Motor India have capitalized on this shift, with JSW MG reporting a 40% year-on-year sales increase in May 2025 [5].

EV Sector: Policy Support vs. Market Headwinds

While GST 2.0 has not directly impacted EV tax rates, the sector’s growth remains contingent on government incentives and infrastructure. The PM E-DRIVE scheme, with a US$1.3 billion budget, aims to accelerate EV adoption through subsidies and charging infrastructure [6]. Tata Motors, India’s largest EV player, has leveraged this momentum, selling 7,088 EVs in August 2025—a 61% YoY increase—and targeting 50% market share by expanding range and price parity with ICE models [7].

Yet, the GST-driven ICE revival poses a challenge. A Livemint analysis notes that EVs’ cost advantage is eroding, with ICE vehicles now priced 15-20% lower in entry-level segments [8]. This could delay India’s 2030 target of 30% EV sales unless automakers emphasize running-cost savings and charging accessibility. Companies like JSW MG are innovating with models like the Windsor EV, which offers a Battery-as-a-Service (BaaS) model to reduce upfront costs [9].

Strategic Moves by Auto Majors

TVS Motor and JSW MG exemplify divergent strategies. TVS has invested ₹2,000 crore in Karnataka to expand ICE and EV manufacturing, while exploring alternatives to rare earth magnets to reduce China dependency [10]. Conversely, JSW MG is doubling down on EVs, with a US$714 million investment in expansion and the launch of the MG4 EV with semisolid-state batteries [11].

Tata Motors, meanwhile, is balancing ICE and EV bets. While it has cut ICE prices to maintain market share, its EV division is prioritizing R&D for battery technology and partnerships to localize production [12]. This dual-track approach reflects the sector’s transitional phase, where ICE remains a cash cow while EVs represent long-term growth.

Investor Implications: Navigating the ICE-EV Dilemma

For investors, the GST 2.0 reform underscores the need to differentiate between short-term ICE gains and long-term EV potential. ICE automakers like TVS Motor and Maruti Suzuki are likely to outperform in the near term due to affordability-driven demand, but their margins could face pressure as EV competition intensifies. Conversely, EV-focused players like Tata Motors and JSW MG Motor India offer higher growth potential, albeit with execution risks tied to infrastructure gaps and supply-chain bottlenecks [13].

A Financial Express analysis highlights that the Indian EV market is projected to reach $7.09 billion by 2025, driven by policy tailwinds and urbanization [14]. However, investors must weigh this against ICE’s entrenched dominance in rural and budget segments. Diversified portfolios that include both ICE and EV leaders—while hedging against regulatory shifts—may offer the most balanced approach.

Conclusion

India’s GST 2.0 reform has created a bifurcated landscape for its auto sector. While ICE vehicles are regaining traction through affordability, EVs remain reliant on policy support and innovation. For investors, the key lies in aligning with companies that can navigate this transition—leveraging ICE’s near-term demand while scaling EV capabilities. As the sector evolves, strategic bets on firms like Tata Motors (EV leadership) and TVS Motor (ICE resilience) will likely yield the most robust returns.

Source:
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[2] Mahindra cuts rates by up to Rs 1.56 lakh after GST reform [https://timesofindia.indiatimes.com/business/india-business/car-prices-mahindra-cuts-rates-by-up-to-rs-1-56-lakh-after-gst-reform-xuv700-thar-scorpio-see-big-drops/articleshow/123736033.cms]
[3] GST Cut: Auto Industry Reactions [https://www.autocarpro.in/news/gst-cut-auto-industry-reactions-128421]
[4] New GST rates make small cars, bikes cheaper. That could be bad news for electric vehicles [https://www.livemint.com/auto-news/new-gst-rates-make-small-cars-bikes-cheaper-that-could-be-bad-news-for-electric-vehicles-11756970117071.html]
[5] Car sales May 2025: Maruti retains top spot, how others performed [https://timesofindia.indiatimes.com/auto/news/car-sales-may-2025-maruti-retains-top-spot-how-others-performed/articleshow/121566234.cms]
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[7] Tata Motors turbocharges EV plans to regain market share [https://www.financialexpress.com/business/industry-tata-motors-turbocharges-ev-plans-to-regain-market-share-3889172/]
[8] A tax cut with unintended impact for India's EV momentum [https://m.economictimes.com/industry/renewables/gst-rate-cut-diwali-tax-cut-with-unintended-impact-for-indias-ev-electric-car-momentum/articleshow/123450520.cms]
[9] MG Motor's Windsor EV hits the Indian market [https://m.economictimes.com/industry/renewables/mg-motors-windsor-ev-hits-the-indian-market-is-this-the-end-of-ice-dominance/articleshow/113274595.cms]
[10] India's Automobile Industry: Growth & Trends [https://ibef.org/industry/india-automobiles]
[11] Srcrc Primer 2025 | PDF | Electric Vehicle [https://www.scribd.com/document/908577927/Srcrc-Primer-2025]
[12] Tata AutoComp Advances Atmanirbhar Bharat with ... [https://www.taxtmi.com/news?id=31086]
[13] Automotive, EV, Energy & Tech Highlights – September 2025 [https://seo.goover.ai/report/202509/go-public-report-en-27e3ca8c-eaca-407f-8823-53538b2254d2-0-0.html]
[14] India Electric Vehicle Market Analysis Report 2024-2031 [https://finance.yahoo.com/news/india-electric-vehicle-market-analysis-110600677.html]