FADA urges FM to resolve compensation cess credit issue under new GST regime ahead of festive season

In a letter to Finance Minister Nirmala Sitharaman, the Federation of Automobile Dealers Associations (FADA) requested prompt clarification and assistance on the transitional treatment of accumulated compensation Cess credit under the new GST 2.0 regime.

In the detailed letter to the FM, FADA expressed gratitude for the government's recent measures that streamlined the GST framework, especially the targeted rate reduction for cars and the streamlined 2+1 tax bracket scheme. These changes will make vehicles more affordable for first-time vehicle buyers, farmers, gig workers, and micro-entrepreneurs, while also strengthening public transport and making lives easier for millions of people, the association said.

However, FADA has pointed out a serious issue that is affecting automobile dealers as they prepare for the lucrative festive season. Dealers currently have adequate accumulated credit from the erstwhile compensation cess levied on motor vehicles. Under GST 2.0, this cess has been subsumed into the GST rates, effectively eliminating any fresh cess liability. What is of concern is that these existing compensation cess credits cannot be adjusted against regular GST liabilities (CGST, SGST, IGST) under the current law, leading to risk of loss of valid credits and putting severe pressure on the working capital of the dealer.

The cessation of Compensation Cess liability without a transitional mechanism to utilise accumulated credits could trigger significant liquidity challenges, the letter stated. FADA warned that more than 95 per cent of dealer inventory is bank-funded, and blocked cess credits could reduce drawing power, heighten financial stress, and increase the risk of covenant breaches with lenders, just as inventory builds ahead of the September to Diwali sales peak.

The association appealed for an enabling provision – either under section 172 or section 164 of the CGST Act, or through suitable legal measures – to allow transfer of existing compensation cess credit to regular GST accounts. They argued that this would protect the vested rights of dealers who have legitimately availed input tax credit and prevent unnecessary disruption to MSME dealerships and the broader financial ecosystem.