GST 2.0 Implemented: PM Hails Reform as Boost for Auto, MSMEs and NBFCs

By

V.P. Nandakumar,

Chairman & MD, Manappuram Finance Ltd

Prime Minister Narendra Modi on September 21 announced the implementation of GST 2.0, calling it a “major step towards simplifying taxation and strengthening India’s economic growth engines.” The reform, which took effect from September 22, brings sweeping changes to the automobile sector, MSMEs, and Non-Banking Finance Companies (NBFCs), with lower rates and the removal of compensation cess expected to trigger a fresh wave of consumption.

Under the new structure, small cars under four metres with engines up to 1,200cc (petrol, CNG or LPG) and 1,500cc (diesel) now attract 18 per cent GST, down from the earlier 28 per cent plus cess. Sub-350cc motorcycles also fall under the 18 per cent slab. The elimination of cess, which previously ranged from 1 to 22 per cent, is expected to bring down the on-road prices of popular mass-market cars and commuter motorcycles.

Luxury cars and motorcycles above 350cc are taxed at 40 per cent under GST 2.0. Although higher than the standard slab, the rate is still below the earlier effective levy of nearly 50 per cent once cess was added. Auto components now attract 18 per cent GST, down from 28 per cent, providing relief to MSMEs in the ancillary sector.

Consumption Boost Expected

Industry observers say the reforms will provide a strong demand-side push for India’s automobile market, one of the largest employers and contributors to GDP. Many carmakers have announced plans to pass on the tax benefits to customers. With the festive season underway and rural sentiment buoyed by a good monsoon, both passenger car and two-wheeler sales are expected to see a sharp increase.

Opportunities for NBFCs and MSMEs

Cheaper vehicles are likely to drive demand for auto financing, with NBFCs poised to benefit given their reach in semi-urban and rural markets. Rising sales will also increase the requirement for ancillaries such as tyres, batteries, plastics and glass, most of which are manufactured by MSMEs. To meet this demand, MSMEs will need to scale capacity and expand working capital, opening new avenues for NBFC lending.

Industry estimates suggest NBFC loan books could grow 15–17 per cent in FY26, powered by GST 2.0 reforms and improved liquidity conditions.

Challenges Remain

Economists caution that while GST 2.0 has eased the burden on consumers and industry, it could create fiscal pressures for the government due to lower indirect tax revenues. For NBFCs, rapid growth in auto and MSME loans will need careful management to avoid risks to asset quality. MSMEs, despite benefiting from stronger demand, continue to face constraints in scaling operations sustainably.

Environmental concerns have also been raised, with the tax cuts centred on conventional petrol and diesel vehicles. Analysts note that this may run counter to India’s long-term push towards electric mobility unless supplemented by incentives for green vehicles.

A Turning Point

Despite these challenges, GST 2.0 is being viewed as a turning point for the economy. By rationalising rates and removing distortions, the reform promises to stimulate demand, expand credit flows, and strengthen the MSME sector. The Prime Minister underscored this in his remarks, stating that GST 2.0 “marks a new chapter in India’s growth story by making taxation simpler, fairer, and more supportive of enterprise.”

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