The Federation of Automobile Dealers Associations of India (FADA) has approached the Supreme Court seeking relief over the Rs. 25 billion (US$ 284.4 million) impact faced by auto dealers due to the compensation cess paid on vehicle inventories purchased prior to the rollout of GST 2.0, which removed the cess.

"With the compensation cess now nil-rated, auto dealers across India suddenly find that their tax-paid credits worth over Rs. 25 billion 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 families secure," said Saharsh Damani, CEO of FADA, in a social media post.

"FADA has now approached the Supreme Court of India - not against GST 2.0, but for fairness and trust," he further 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 8th, urging a transitional solution before the rollout of GST 2.0 on September 22nd. The federation had suggested transferring balances in the compensation cess credit ledger to the Integrated GST (IGST) or Central GST (CGST) ledger, enabling 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 stated in its letter.

The compensation cess, ranging from 1% to 22% depending on the vehicle category, was eliminated as part of GST 2.0 reforms, which also reduced GST on small cars, motorcycles up to 350 cc, three-wheelers, and commercial vehicles from 28% to 18%. The change was aimed at adjusting tax structures and stimulating demand, but it has left dealers unable to offset the cess already paid on vehicles purchased before the new rates took effect.

The blocked credits could strain dealer finances. "Over 95% 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 warned. "This is not a revenue give-away; it is about preserving legitimate, tax-paid credits and preventing avoidable stress for MSMEs and the financial system."

"GST 2.0 marks an important stage in India's tax framework. FADA has supported the reform, but for thousands of auto dealers - mostly MSMEs - one issue has created financial challenges," Damani said. "Reforms should protect what has been legitimately earned. It is expected that the Finance Minister and the Government of India will review the matter."

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 are not directly affected by this issue. "Inventory was purchased at one rate, and after September 22nd it has been sold at another, without cess. That gap affects only the dealers, not the buyers," Damani said.

"Legally, this is the property of the dealer and not that of the Government. Either the Government refunds it, or brings in an amendment in the GST Act through which the cess amount can be adjusted against either CGST (Central GST) or IGST (Integrated GST)," Damani stated.

Such a measure would require a Parliamentary amendment. According to Damani, to implement this, the Government would have to amend the law. "This can only happen if a special session of Parliament is called, or if it is taken up as an agenda item during the winter session," he further added.