Centre’s GST ‘gift’ to car buyers skips the fine print for dealers

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.

MSMEs under strain: Most dealerships are family-owned businesses that fall squarely under the micro, small and medium enterprise (MSME) definition.

They operate on wafer-thin margins and depend heavily on bank lines to fund inventory. With paid-up cess locked, many now face a severe liquidity squeeze that could impair their ability to service loans or invest in expansion.

As a Delhi-based dealer said, “The government has made cars cheaper for customers, but costlier for us to sell.” Bankers too warn that the sudden liquidity strain could push small dealerships into distress.

Consumers may lose out too over time: For Indian automobile consumers, GST 2.0 appears to be an unqualified win—cheaper cars and record discounts. But a financially squeezed dealer network carries hidden risks.

If cess credits remain locked, many MSME dealerships could cut back on expansion, shut outlets or scale down their service operations.

The eventual effect would be fewer showrooms in small towns, weak after-sales support and slower rural penetration. Over time, thus, auto consumers may find that the short-term bonanza came at the cost of choice, convenience and service quality.

This policy-induced complication is unfair to an automobile industry that is not only among the largest employers in India’s manufacturing sector, but also a critical driver of India’s Atmanirbhar Bharat agenda.

With a 7.1% contribution to GDP and 49% to the country’s manufacturing output, any prolonged disruption in dealer viability risks weakening broader supply chains.

Why the government is reluctant: From the Centre’s perspective, abolishing the cess was necessary to simplify GST and address industry demands for a cleaner and unified rate structure.

Officials argue that providing transitional credit to overcome the problem could lead to additional revenue leakage. At the same time, there is political mileage to be gained in highlighting how consumers are paying less for cars, even if dealers are left struggling.

In principle, the amounts involved are not “new revenue forgone”—they represent a tax component already paid. Transitional relief for dealers would not dent exchequer inflows, but shore up confidence in the fairness of the regime.

In fact, withholding relief risks eroding trust between Indian policymakers and MSMEs, a segment that the government identifies as a priority.

What dealers want: The Federation of Automobile Dealers Association has urged the Prime Minister’s Office to look into a solution by which the balance lying in the compensation cess credit ledger as on 21 September is transferred to the integrated GST and central GST credit ledgers to use for meeting regular GST liabilities.

Transitional credit is administratively feasible. During the original GST rollout in 2017, such credit mechanisms were provided for excise and VAT-paid stocks to ensure that taxes already paid under the old regime were not left stranded. A similar framework can cushion the blow this time as well.

Other possible fixes have also been suggested: a one-time refund window for cess balances, staggered adjustment against future GST dues, or even a special dispensation for MSME dealers below a turnover threshold. Any of these could help dealers out.

Roadblock risk: The optics of cheaper cars and festive discounts may dominate headlines. Yet, the sobering reality is that manufacturers are bearing the cost of keeping demand up while auto dealers are stuck with blocked money.

Unless policymakers step in with a transition solution, what began as a celebratory reform could turn into a roadblock. Dealerships should be protected to preserve supply chain stability and ensure a glitch-free rollout of GST 2.0.

The author is head of tax at BTG Advaya, a law firm.