GST 2.0 is a proud milestone in India's tax journey, but with the compensation cess now nil-rated, auto dealers across India suddenly find their tax-paid credits worth over ₹2,500 crore at risk of being wiped out, says FADA.
17 Oct 2025 | 7435 Views | By Darshan Nakhwa
The Federation of Automobile Dealers Associations of India has approached the Supreme Court to seek relief over Rs 2,500 crore impact to auto dealers, from compensation cess paid on vehicle inventory purchased before the rollout of GST 2.0–which removed cess.
"With the compensation cess now nil-rated, auto dealers across ...
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The Federation of Automobile Dealers Associations of India has approached the Supreme Court to seek relief over Rs 2,500 crore impact to auto dealers, from compensation cess paid on vehicle inventory purchased before the rollout of GST 2.0–which removed cess.
"With the compensation cess now nil-rated, auto dealers across India suddenly find that their tax-paid credits worth over ₹2,500 crore risk being wiped out, with no way to adjust or refund them. These aren't just ledger entries. They're the working capital that keeps showrooms open, salaries paid, and 50 lakh families secure," said Saharsh Damani, CEO of FADA, in a LinkedIn post.
"FADA has now approached the Hon'ble Supreme Court of India — not against GST 2.0, but for fairness and trust," he added. "Our plea is simple: protect what's rightfully earned. Build a bridge so genuine, tax-paid credits don't disappear overnight."
The industry body's petition follows repeated appeals to the government in recent weeks, including a letter to Prime Minister Narendra Modi on September 8, urging a transitional solution before GST 2.0's rollout on September 22. The federation had suggested transferring balances in the compensation cess credit ledger to the integrated GST (IGST) or central GST (CGST) ledger, allowing dealers to use them against future tax liabilities.
"Auto dealerships across India hold significant, validly availed compensation cess balances in their electronic credit ledgers. Under current law, these balances cannot be used against CGST/SGST/IGST, and will lapse unless a transitional pathway is created. This converts legitimate, tax-paid credits into dead capital," FADA had said in its letter.
The compensation cess, ranging from 1% to 22% depending on vehicle category, was eliminated as part of GST 2.0 reforms, which also lowered GST on small cars, motorcycles up to 350 cc, three-wheelers, and commercial vehicles from 28% to 18%. The move, aimed at boosting affordability and demand, has been widely welcomed, but it leaves dealers unable to offset the cess they had already paid on vehicles bought before the new rates took effect.
"As of now, there are six lakh passenger vehicles in the system. Even with a minimum calculation, at an average price of ₹12.5 lakh per vehicle and an average cess of 3%, the cess per vehicle comes to about ₹38,000," Damani had told Autocar Professional earlier. "For six lakh vehicles, that works out to nearly ₹2,500 crore. This entire amount is blocked in dealers' books."
The blocked credits threaten to strain dealer finances. "Over 95 percent of dealer inventory is bank-funded. If credit becomes unusable, drawing power shrinks, interest costs rise and covenants strain, just when the industry builds stocks for September-to-Diwali deliveries," FADA had warned. "This is not revenue give-away; it is about preserving legitimate, tax-paid credits and preventing avoidable stress for MSMEs and the financial system."
"GST 2.0 is a proud milestone in India's tax journey–simpler, transparent and people-first. We at FADA have welcomed it wholeheartedly. But for thousands of auto dealers–mostly MSMEs who have stood with every reform–one issue has caused deep distress," Damani said. "Reforms should empower, not erase what's earned. And I'm confident that the Hon'ble Finance Minister and Government of India will resolve this with compassion and foresight."
Explainer
Dealers pay cess on wholesale purchases from OEMs and recover it at the retail stage. In the normal course of business, dealers pay GST and cess when purchasing vehicles from manufacturers and then collect the same charges from customers at the point of sale. This system can leave credits blocked in dealers' books until they are able to offset them.
"Everything gets offset: GST against GST and cess against cess," Damani explained. "Even if sales go up, the cess amount is blocked. A dealer is not profiting from it," he added.
Customers will not feel the pinch in their pockets, but dealers will. "We bought inventory at one rate, and after September 22 we have been selling it at another, without cess. That gap hits only the dealers, not the buyers," Damani said.
"Legally, this is the property of the dealer and not the property of the government. Either the government refunds it back, or brings in an amendment in the GST Act through which we can adjust the cess amount against either CGST (central GST) or IGST (integrated GST)," Damani said.
Such a step would require a Parliamentary amendment. Damani said to make this happen, the government has to amend the law. "This can only happen if they call a special session of Parliament, or if in the winter session they take it up as an agenda item," he added.