The shares of Indian automakers sharply surged on September 4, after the GST Council approved a slew of reforms to the tax regime. The sharp rise in the share prices pushed the Nifty Auto index up more than 3 percent.

The Nifty Auto index was hovering around 26,612.20, the highest level seen in nearly 11 months.

During its meeting which concluded on September 3, the Goods and Services Tax (GST) Council reduced the GST rate on all small cars from 28 percent to 18 percent. This includes petrol, LPG or CNG cars with engine capacity up to 1200 cc and length up to 4000 mm, and diesel cars with engine capacity up to 1500 cc and length up to 4000 mm.

The 10-point cut is expected to shave 5-7 percent off ex-showroom prices of popular models such as Maruti Swift, Hyundai i10, Tata Punch and compact SUVs like the Brezza and Venue.

While small hybrids that qualify as small cars will also benefit from the 18 percent slab, larger petrol-electric and diesel-electric hybrids have been pushed into the top tax bracket.

Vehicles with engines above 1200cc (for petrol) or 1500cc (for diesel), or length exceeding four metres, will now attract 40 percent GST, up from 28 percent. Pure EVs remain taxed at just 5 percent, signalling the government's preference for direct EV adoption.

However, removal of cess that was previously applicable over and above the GST, is likely to result in marginal relief for premium and luxury vehicles as well as for hybrids. Cess, in the range of 1 percent to 22 percent was earlier charged above the 28 percent GST rate for different class of vehicles. This cess will now no longer be applicable, helping some categories of large vehicles to benefit from this move, despite GST rate moving up to 40 percent.

Premium and luxury vehicles remain heavily taxed, with cars and SUVs that fall outside the small car definition continuing in the 40 percent bracket.

Motorcycles above 350cc will also face 40 percent GST, up from 28 percent, while two-wheelers up to 350cc, three-wheelers and ambulances will shift to the lower 18 percent rate.

Mahindra & Mahindra (M&M) shares gained nearly 7 percent to trade at Rs 3,505 apiece, while Eicher Motors, Tata Motors and Maruti Suzuki shares rose more than 2 percent each. TVS Motors, Hero MotoCorp and others meanwhile were up around 1 percent each.

Escorts Kubota shares meanwhile rallied nearly 9 percent in early trading hours. This comes after GST on tractors was reduced to 5 percent.

"GST 2.0 marks a defining reset for India’s consumption story. By rationalising slabs and lowering rates on mass categories while taxing sin goods higher, the Council has unlocked volume tailwinds for staples, durables and autos—reshaping equity market leadership in the coming years," said Trideep Bhattacharya, President and CIO- Equities Edelweiss MF.

"The GST rate cuts come at the right time which is just ahead of the festive season and against the backdrop of US tariff tiffs. Lower taxes on essentials, FMCG products, autos and cement will leave consumers with more money in hand. This should directly boost demand, help traders and businesses see higher volumes, and may even favourably impact next quarter’s earnings. It also carries the potential to ease inflation. The key will be how quickly companies pass on the benefits to customers and if done well, this move can lift both sentiment and spending," said Santosh Meena, Head of Research at Swastika Investmart.