By Kavita Mistry 
Banks across India are witnessing a surge in requests for cancellation of approved car loans following the GST Council’s decision to cut tax rates on passenger vehicles. Customers are opting to delay purchases until after September 22, when the revised GST rates will take effect, lowering vehicle prices and reducing loan requirements.
GST Cuts on Cars and Essentials Prompt Loan Cancellations, Boost Consumer Savings
At the 56th GST Council meeting held earlier this month, it was decided that GST on cars with engine capacity up to 1,200 cc would be reduced from 28% to 18%. This move is part of a broader rationalisation, under which nearly 400 products ranging from soaps, shampoos, and air conditioners to tractors and cars will become cheaper starting the first day of Navaratri.
Bank officials confirmed that many borrowers are choosing to cancel current approvals since cancellation charges are minimal compared to the savings they will gain under the new rates. Several banks have also waived processing fees on vehicle and home loans during the monsoon period to attract customers, further easing the transition.
₹2,500 Crore Compensation Cess to Lapse Under New GST Regime
A senior official from the Central Board of Indirect Taxes and Customs (CBIC) clarified that the old GST rate would apply if an invoice has already been issued by a dealer. However, if no invoice is generated, buyers will benefit from the new 18% rate. The official also noted that car sales are experiencing a temporary slowdown, partly due to the Shradha period ending September 21, and because buyers prefer to wait for post-cut benefits. Some customers are even upgrading to higher-capacity models, such as cars in the 1,300 cc range, where effective savings of around 10% are possible.
Another development relates to the accumulated compensation cess, estimated at ₹2,500 crores, on the books of automobile companies. This cess will lapse when the new GST rates take effect. Currently, cars are taxed at 28% GST plus a compensation cess of 1–22%, depending on size and engine type, resulting in a tax incidence of 29% for small petrol cars and up to 50% for SUVs. From September 22, small cars up to 1,200 cc petrol and 1,500 cc diesel will attract 18% GST, while larger vehicles will be taxed at 40%. CBIC Chairman Sanjay Kumar Agarwal reiterated that compensation cess was introduced for a specific purpose, and once withdrawn, any accumulated credit will remain in company books without adjustment.
Summary:
The GST Council’s tax cut on cars up to 1,200 cc from 28% to 18% has led many buyers to cancel or delay loans until September 22. Nearly 400 items will also get cheaper. Car sales slowed, while a ₹2,500 crore compensation cess on automakers will lapse under the new regime.