GST 2.0, customs reliefs and Indo–Japan FTA to redefine India’s USD 74 billion auto component ecosystem

India’s automotive industry — contributing 7.1% to the country’s GDP and nearly half of its manufacturing GDP — produced 28 million vehicles in 2024, an 8% rise over 2023, while exports exceeded 4.5 million units, unveils Grant Thornton Bharat and the Indo-Japan Chamber of Commerce and Industry (IJCCI) in their latest whitepaper titled “Navigating change: GST 2.0, customs, and FTA impacts on the India–Japan auto sector.” Backed by USD 43.3 billion in cumulative Japanese investments, making Japan India’s fifth-largest foreign investor, the paper provides a comprehensive analysis of India’s evolving regulatory environment, examining how GST 2.0 reforms, customs duty changes, and the Indo–Japan Free Trade Agreement (CEPA) are collectively reshaping the competitiveness and future trajectory of the automotive industry.

The rollout of GST 2.0 in September 2025 marked a pivotal shift for India’s automotive sector, streamlining tax structures, enhancing affordability, and catalysing consumer demand across vehicle segments. Under the revised GST regime, small cars and motorcycles under 350cc now attract 18% GST, down from 28% plus cess, resulting in price reductions of up to INR 1 lakh for select models. Premium vehicles, including SUVs and high-end motorcycles, now face a flat 40% GST, while electric vehicles continue to benefit from a 5% GST, reinforcing support for green mobility.

Following the rate changes, the industry recorded a sharp surge in customer interest and vehicle deliveries, with booking volumes rising by nearly 50% in the small car segment. Complementing GST reforms, the Union Budget 2025 announced measures to boost the EV sector by balancing supply and demand incentives. Customs duty exemptions on lithium-ion battery scrap and critical minerals such as lead and copper aim to secure raw materials and generate employment.

The convergence of GST 2.0 and targeted customs incentives marks a defining moment for India’s automotive sector. Reduced tax rates, simplified compliance, and supply-chain-focused exemptions will not only elevate India’s cost competitiveness but also strengthen its positioning as a manufacturing and export hub for Japanese automakers.

Sohrab Bararia
Partner, India Investment Advisory, Grant Thornton Bharat

Additional exemptions on capital goods for battery manufacturing further support the ecosystem, while tariff reductions on motorcycles and CKD/SKD units of large vehicles enhance affordability and competitiveness in line with the Atmanirbhar Bharat vision. The report indicates that this regulatory reset will accelerate investment flows, promote EV adoption, and drive the next wave of Indo–Japan collaboration in clean mobility and advanced manufacturing.

Saket Mehra
Partner, Auto & EV Industry Leader, Grant Thornton Bharat

The India–Japan CEPA and the India–Japan Digital Partnership (IJDP) are fostering innovation in EVs, connected vehicles, and AI-led manufacturing, while initiatives like the Supply Chain Resilience Initiative (SCRI) are promoting localisation of critical components and diversification of sourcing. Under the Japan-India Institute for Manufacturing (JIM) and Japanese Endowed Courses (JEC), over 30,000 Indian engineers are being trained to Japanese manufacturing standards — building a skilled workforce for advanced automotive production. Some of the key customs and trade policy schemes driving competitiveness:

• MOOWR Scheme (2019): Enables duty-free import of capital goods and raw materials within bonded warehouses.
• EPCG Scheme: Allows import of machinery at concessional duty to support export-led growth.
• Advance Authorisation Scheme: Provides duty-free import of inputs used for exports.
• RoDTEP Scheme: Rebates embedded levies to ensure full tax neutrality in exports.

There is significant partnership between India and Japan in the automotive sector, particularly in the realms of hybrid and electric vehicles, and high-precision components. The Free Trade Agreement (FTA) serves as a crucial catalyst for collaboration, joint research and development, and knowledge transfer, further supported by the India-Japan Industrial Competitiveness Partnership (IJICP). Recent initiatives have greatly advanced our automotive collaboration, especially in clean mobility and advanced manufacturing. The implementation of the GST 2.0 reform stands as a boon to Prime Minister Narendra Modi’s Atmanirbhar Bharat programme, fostering an environment conducive to growth. Notably, car exports from India to Japan reached USD 616.45 million in the first nine months of FY2025, with auto component exports amounting to USD 171.72 million in 2024. The joint efforts through the Indo-Japan Chamber of Commerce and Industry in Chennai and Grant Thornton Bharat have effectively disseminated valuable information to the business communities in both countries. As we navigate the intersection of regulatory transformation and global collaboration, we are poised to unlock even greater opportunities within the Indian automotive sector.

Suguna Ramamoorthy
Secretary General, Indo-Japan Chamber of Commerce and Industry

Therefore, as the industry stands at the intersection of regulatory transformation and global collaboration, sustained policy alignment under GST 2.0, progressive customs reforms, and deeper utilisation of the Indo–Japan FTA will be key to driving competitiveness, enabling technology transfer, and advancing India’s journey toward a sustainable, innovation-led automotive future.