Synopsis

Tax cuts on small cars have increased their market share, rising from 2.3% to 3.3% recently. Sport utility vehicles have continued to gain popularity, increasing their share to 58%. Maruti Suzuki reported a significant rise in sales for their small cars after the tax reduction. Although affordability has improved, customer aspirations are shifting towards SUVs as first cars.

Mumbai: An unprecedented tax cut on passenger vehicles a year ago may have helped arrest declining entry-level small car sales though doing little to impact sustained strong consumer demand for SUVs.

The market share of entry-level hatchbacks rose from 2.3% in the first half of FY26 - the period prior to the cut in goods and services tax (GST) with effect from September 22, 2025 - to 3.3% in the first five months of this fiscal year, showed data from Jato Dynamics.

Also Read: Auto sales growth likely to normalise after festive inventory build-up; West Asia inflation a risk: Report

However, the recovery was limited to only entry-level small cars; the broader hatchback segment stayed stable at around 21%.

Sport utility vehicles, meanwhile, continued to rise, securing a 58% share in FY27 so far, up from 56% in the six months before the GST cut.

Notably, entry-level hatchbacks had a near 8% share just five years ago, which has since dropped, while the share of SUVs climbed from 40% in FY22.

ET Bureau

"That is a modest improvement at the entry end within a broader category (hatchbacks) that remains under pressure," said Ravi Bhatia, president, Jato Dynamics. "It also shows that entry-car recovery and SUV expansion can occur simultaneously."

However, Bhatia cautioned against over-attributing market shifts to tax cuts alone, saying lower car prices, additional sales and higher market share need to be assessed separately.

The GST reduction was substantial - taxes on small cars fell to 18% from 28%, while mid-size and larger vehicles moved to a flat 40%, down from 45-50% earlier after cess.

Also Read: Govt set to consider auto PLI applications with Chinese investment after FDI nod

Partho Banerjee, senior executive officer, sales and marketing, Maruti Suzuki, said the company's small car sales rose 58% this year, with entry cars surging 96%, lifting its market share by 1.8 percentage points. "The GST cut has significantly improved affordability. However, rising customer aspirations have also contributed to the recovery," Banerjee said. "Whenever affordability improves and customers are offered the right product at the right price, demand in the small car responds positively."

The trend showed that a genuine tax-driven demand can coexist with a deeper, irreversible consumer shift in what buyers now consider an aspirational first car - which, increasingly, is either a pre-owned mid-sized SUV or a new entry-level SUV. This means the return of first-time buyers who had developed cold feet during the prolonged slowdown in entry-level cars isn't necessarily translating into a revival of the traditional small car market.

According to Cars24, the share of hatchbacks fell to 50.5% of used car sales in FY26 from 58.7% in FY22. SUVs nearly doubled their share to 21.8% from 11% in the same period, showed data from the used car platform.

Read More News on

...moreless