India aims to slash taxes on small cars and insurance premiums as part of a sweeping reform of its goods and services tax (GST), a government source said on Monday, sparking a rally in Indian stock markets.

Prime Minister Narendra Modi’s administration revealed plans over the weekend for the largest tax overhaul since 2017, with consumer, auto and insurance companies likely to emerge as the biggest winners when product prices drop from October, once the reform is approved.

The federal government has suggested lowering GST on small petrol and diesel cars to 18 per cent from the current 28 per cent, said the source who is directly involved in the matter.

The consumption tax on health and life insurance premiums may also be lowered to 5 per cent or even zero from 18 per cent currently, the same source said.

Shares of Maruti Suzuki the biggest seller of small petrol cars in India, surged nearly 9 per cent on Monday, leading a rally in auto shares that helped push India’s benchmark Nifty index 1.3 per cent higher on course for its best day in three months.

Shares of other carmakers such as Mahindra and Mahindra as well as motorbike manufacturers like Hero MotoCorp and Bajaj Auto, which will also benefit from tax cuts, jumped 2 per cent -4 per cent  on Monday.

Stocks of insurance companies such as ICICI Prudential, SBI Life and LIC rose as much as 2 per cent -5 per cent before pairing some gains.

Modi’s deep tax cuts will strain government revenues but have drawn praise from businesses and political pundits who say they will bolster his image in an ongoing trade fight with Washington.

Maruti Chairman R.C. Bhargava said the tax rationalisation is a “huge reform”.

“With more affordability, more people will come into the purchasing system,” said Bhargava, who declined to comment on proposed tax cuts on small cars until the fine print is out.

“This restructuring of the GST will increase competitiveness of Indian products and the opening of trade borders will bring in the necessary competition. Competition, combined with your ability to produce and sell at lower prices, makes for the best efficiency,” he added.

Federal government officials over the weekend said New Delhi has proposed only two rates of taxation – 5 per cent and 18 per cent – under the revamped structure. The highest 28 per cent rate will be abolished.

The new proposal, however, will impose a 40 per cent tax on 5-7 “sin-goods” like tobacco products and luxury items.

The announcement will not be effective until the GST Council, which is chaired by the federal finance minister and has representatives from all states, gives a nod. A meeting is expected by October.

India’s finance ministry did not reply to an email seeking comment.

Sales of small cars, defined as those having engine capacity below 1200cc for petrol vehicles and 1500cc for diesel and not exceeding 4 metres in length, have slowed over the last few years as buyers switched to bigger, feature-rich SUVs.

Small cars made up a third of the 4.3 million passenger vehicles sold in the world’s third-largest automobile market last fiscal year, down from nearly 50 per cent pre-Covid, industry data showed.

The segment makes up half of all cars sold by Maruti, majority-owned by Japan’s Suzuki Motor, which saw its market share plunge to about 40 per cent from over 50 per cent in the last five years as sales of its Alto, Dzire and Wagon-R models dropped.

Carmakers Hyundai Motor India and Tata Motors also stand to gain.

Cars with higher engine capacity that currently attract 28 per cent  GST and an additional levy of up to 22 per cent – resulting in total taxes of about 50 per cent – may come under a new special rate of 40 per cent, the source said.

The government source added that details are being firmved up to consider if any extra levies should be imposed over the 40 per cent to keep the overall tax incidence for big cars the same at 43 per cent – 50 per cent.

On the other hand insurance penetration in India continues to remain low, at 3.8 per cent of GDP, in 2024, according to research firm Swiss Re Institute. The companies believe lowering of GST will help boost sales of insurance products.

• A Reuters report