A tax cut on passenger vehicles a year ago may have contributed to a change in entry-level small car sales, while consumer demand for SUVs has continued.

The market share of entry-level hatchbacks rose from 2.3% in the first half of FY26 - the period before the cut in goods and services tax (GST) took effect on September 22nd, 2025 - to 3.3% in the first five months of the current fiscal year, according to data from a market research firm.

The change was limited to entry-level small cars, while the broader hatchback segment remained at around 21%.

Sport utility vehicles, meanwhile, accounted for 58% of the market in FY27 so far, compared with 56% in the six months before the GST cut.

Entry-level hatchbacks accounted for nearly 8% of the market five years ago, but their share has since declined. The share of SUVs increased from 40% in FY22.

"That is a modest improvement at the entry end within a broader category (hatchbacks) that remains under pressure," said an executive of a market research firm. "It also shows that entry-car recovery and SUV expansion can occur simultaneously."

However, the executive cautioned against attributing market shifts solely to tax cuts, stating that lower car prices, additional sales and higher market share need to be assessed separately.

Under the GST reduction, taxes on small cars fell to 18% from 28%, while taxes on mid-size and larger vehicles were reduced to a flat 40% from 45-50%, including cess.

Partho Banerjee, Senior Executive Officer, Sales and Marketing, Maruti Suzuki, said the company's small car sales rose 58% this year, with entry-level cars increasing by 96% and the company's market share rising 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 data indicates that tax-related changes in demand are occurring alongside a shift in consumer preferences regarding first-car purchases. Increasingly, buyers are choosing either a pre-owned mid-sized SUV or a new entry-level SUV. As a result, the return of first-time buyers who had delayed purchases during the slowdown in entry-level car sales is not necessarily translating into increased demand for traditional small cars.

According to a local daily, the share of hatchbacks fell to 50.5% of used car sales in FY26 from 58.7% in FY22. SUVs increased their share to 21.8% from 11% over the same period, according to data from a used car platform.