FADA Warns of Rs 2,500-Crore Hit to Car Dealers from Cess Paid on Festive Inventory

India’s automobile dealers have sounded the alarm over a looming Rs 2,500-crore blow from cess already paid on festive season passenger vehicle inventory, warning that blocked credits could leave many retailers strapped for working capital. The warning comes days after the Goods and Services Tax (GST) Council, chaired by Finance Minister Nirmala Sitharaman, slashed GST rates on small cars, two-wheelers up to 350cc, and other vehicles to 18% from 28%, while also scrapping the associated cess from September 22.

“While the recent GST cut is a fantastic initiative, the one big challenge for the auto retail fraternity is the cess amount on already bought inventory,” said Saharsh Damani, CEO, Federation of Automobile Dealers Associations (FADA).

“As of now, there are six lakh passenger vehicles in the system. Even with a minimum calculation, at an average price of Rs 12.5 lakh per vehicle and an average cess of 3%, the cess per vehicle comes to about Rs 38,000,” said Damani. “For six lakh vehicles, that works out to nearly Rs 2,500 crore. This entire amount is blocked in dealers’ books.” The estimate does not include two-wheelers above 350cc.

From September 22, GST on small cars, motorcycles up to 350cc, three-wheelers, buses, trucks, and ambulances will drop from 28% to 18%. The associated cess, which ranges from 1% to 22% across different passenger vehicles, will also be removed.

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 will have to sell 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 have 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.

Working Capital Squeeze

While the rate cut is expected to boost sales in the mass-market segment, FADA CEO warns that blocked credits will strain working capital during the peak festive season. “One third of annual sales happen in these days. Inventory levels are always high, which means channel funding is higher than average. Above that, if my cess is not getting adjusted, my working capital gets blocked. I go overly high on leverage,” Damani said.

Dealers also fear default risks. If they are unable to repay tranche amounts to banks on time, their capital position weakens and they face penal interest charges. The cess balance in their books effectively becomes unusable, turning into an amount they may have to forgo.

Customer Impact Through Delays

September 22 also marks the first day of Navratri, a preferred date for vehicle purchases. Dealers, however, may struggle to deliver. “Many people want deliveries that day, but dealers may struggle with stocks because of the cess confusion. If I take dispatch from OEM now, I have to pay tax which I may not be able to adjust later. That’s a chicken-and-egg situation,” he explained.

If some models are in short supply, dealers may still hold back orders because of the cess confusion. This could lead to delivery delays, with many buyers unable to get their vehicles on the first day of Navratri as they would prefer.

Industry Already Under Pressure

The GST transition comes at a weak moment for the auto sector. In August 2025, all major carmakers reported declines in domestic sales as speculation around tax cuts prompted dealers to hold back purchases. Maruti Suzuki’s sales fell 8.2% to 131,278 units, Hyundai slipped 11.2% to 44,001, Tata Motors dropped 7% to 41,001, and Mahindra’s SUV sales declined 9% to 39,399 units.

Despite the disruptions, dealers remain cautiously optimistic. “Overall sentiment is good. There will be a lot of benefit coming to the customer, especially at the bottom of the pyramid. Many people who were not able to afford a vehicle earlier will be able to buy one now maybe a two-wheeler or a car,” Damani said.