Don't turn the cess rollback into a hurdle for India's auto industry

A transition mechanism could save dealerships the cess payments they've made on unsold inventory

- AMIT BAID

When the Goods and Services Tax (GST) Council unveiled GST 2.0 earlier this month, one of the headline changes was the abolition of compensation cess on automobiles.

For consumers, this looks like a festive season bonanza—cars are about to get cheaper and dealers are dangling record discounts. But behind the glitter of showroom offers lies a thorny problem: the absence of a transitional credit or refund mechanism for compensation cess has left the broader auto industry nursing a tax hit of over ₹2,500 crore.

Simply put, dealers pay GST and compensation cess when they buy cars from manufacturers. Earlier, they recovered this by charging customers the same taxes, with input tax credits deducted from the bill. But unlike GST, compensation cess can only be adjusted against cess collections. With the cess abolished from 22 September, dealers cannot collect it anymore, leaving the cess already paid on unsold stock locked in their books with no way to use it.

Discounts can't plug a structural gap. In general, the belief is that GST 2.0 is a win-win for all. Car manufacturers, including Maruti, Hyundai, Mahindra, Tata and Kia, have rolled out deep discounts to move stock. While these lower MRPs and keep showrooms busy, the do not address the core issue: how to recover the cess already paid. This blocked capital sits in dealer ledgers, squeezing working capital and creating financing stress for businesses already reliant on bank credit.