Supreme Court Admits FADA Plea Over ₹2,500 Crore Cess Issue After GST 2.0 

The Supreme Court has admitted a petition filed by the Federation of Automobile Dealers Associations of India (FADA) seeking relief over blocked compensation cess credits worth more than ₹2,500 crore.

The court has issued notices to the government seeking its response. The matter is scheduled for hearing on March 25, 2026.

The case relates to compensation cess paid by dealers on vehicle inventory purchased before the rollout of GST 2.0. The reform eliminated compensation cess and reduced GST rates on several vehicle categories.

While the move was widely welcomed by the industry, it left dealers unable to utilise the cess credits they had already paid.

“What’s important and largely undocumented is the severe working capital stress dealers are facing because the accumulated cess credit in their ledgers has become unusable,” said Saharsh Damani, CEO of FADA, in a LinkedIn post.

“These aren't just ledger entries. They're the working capital that keeps showrooms open, salaries paid, and 50 lakh families secure,” he added.

According to the federation, the issue affects a large portion of the dealer network, most of which operates as MSMEs.

Inventory Bought Before GST 2.0

Under the earlier system, dealers paid GST and compensation cess when purchasing vehicles from manufacturers. They recovered the same taxes when selling vehicles to customers.

Normally, GST credits are adjusted against GST liabilities, while cess is offset against cess.
However, GST 2.0 removed compensation cess entirely. As a result, dealers cannot adjust cess credits against other tax categories.

“Auto dealerships across India hold significant, validly availed compensation cess balances in their electronic credit ledgers,” FADA said in a letter to the government. “Under current law, these balances cannot be used against CGST, SGST or IGST and will lapse unless a transitional pathway is created.”

This effectively converts legitimate tax credits into unusable capital. FADA estimates the financial impact at around ₹2,500 crore. 

FADA has repeatedly approached the government seeking a transitional solution.
In September last year, the federation wrote to Prime Minister Narendra Modi requesting a mechanism before the GST 2.0 rollout.

It proposed transferring balances in the compensation cess ledger to either the integrated GST (IGST) or central GST (CGST) ledger. This would allow dealers to adjust them against future tax liabilities.

Dealers say the problem arises because vehicles bought before September 22 were taxed differently from those sold after GST 2.0 came into effect.

“We bought inventory at one rate and after September 22 we are selling it at another without cess,” Damani said. “That gap hit only the dealers, not the buyers.”