With uncertainty looming over the inability to claim unutilised cess credits, several car dealers are mulling the legal route to minimize losses, and are seeking legal advice if they should approach courts after September 22 – when the new GST rates will come into effect – to seek refund of the tax that has already been paid, people familiar with the matter have told Moneycontrol.
The 56th GST Council has recommended that a compensation cess be levied only on tobacco and related products. The cess that is currently applicable on automobiles in the range of 17-22% over and above the 28% GST rate will cease to exist post September 22, and only 40% GST will be levied on such vehicles.
Under GST 1.0, a compensation cess between 17-22% was levied on cars, taking the effective tax incidence to between 45-50%. Now, the new GST reforms have done away with the compensation cess which was collected to compensate the states for any revenue loss.
The car dealers who have already purchased vehicles from manufacturers at the current GST rate (28% plus cess) won’t be able to claim any credit on the cess paid after September 22. Industry estimates suggest that the cess paid, which can’t be claimed later, is to the tune of Rs 2,500 crore.
Hence, car dealers are seeking a remedy by way of a mechanism to ensure refunds of the cess paid. Government officials have told Moneycontrol that discussions are underway in the Central Board of Indirect Taxes and Customs (CBIC) to provide for a similar mechanism.
Last week, CBIC Chairman Sanjay Agarwal had told Moneycontrol that businesses will adopt to newer rates over a period of time, even as they will have excess credit (of input tax) or lower, for some period. “…it’s a transition period, under which some businesses may have to incur loss on their margins, while some may gain,” he had said.
On September 7, the Finance Ministry clarified on X that an informal message claiming to be from Chairman CBIC is being widely circulated on social media, claiming that certain Transition Benefits under GST will be applicable from September 22, 2025 on issues related to: (a) unutilised cess credit, ITC of exempted supplies; and (b) new price adjustment provisions etc. “It is hereby informed that such claims are factually incorrect and misleading,” the post said.
A tax expert said, “The reduction of rates on certain categories of cars is intended to benefit buyers, and any blockage of compensation cess would consequently result in tax cascading. Therefore, dealers should be entitled to claim a refund of the blocked compensation cess, either through statutory provisions as and when notified, or by invoking the constitutional remedy under Article 226.”
Another tax expert said that lapse of cess would add to the cost for industry. “The Government may provide for a refund mechanism for accumulated cess. Whereas, the other option would be to allow the offset of cess against future GST liability, but it will require legislative changes,” he said.
The Federation of Automobile Dealers Association (FADA) wrote to Finance Minister Nirmala Sitharaman on September 8 that dealerships were ‘extremely anxious’.
“While GST 2.0 subsumes the earlier Compensation Cess regime for automobiles, dealers today hold significant, validly availed Compensation Cess balances in their electronic credit ledgers. Once no further cess liability arises, these balances cannot be utilised against CGST/SGST/IGST under the current law. Without a transitional pathway, credits risk lapsing, creating an unintended, permanent loss and a sharp working-capital shock for compliant MSME dealerships,” FADA said.
To address this, tax experts have suggested that an official notification be issued, allowing all registered dealers to transfer the balance of compensation cess credit lying in their electronic credit ledger as on September 22, 2025 into the CGST account.
Dealers may then be asked to file a return or a specified form within a limited period declaring the compensation cess credit available. Based on such filing, the said credit should be transferred from the compensation cess ledger to the CGST ledger, they said.
“Dealers would then be permitted to set off their future CGST liability against the compensation cess so transferred. Given that GST at 40% will apply (20% CGST + 20% SGST), the transferred balance can be used to discharge the 20% CGST portion, ensuring there is no loss of credit,” another tax expert explained.
He said that the transfer of compensation cess credit to CGST would mean the central government bears the initial adjustment, but added that the transferred amount will be recovered by continuing cess on specified products.
According to the GST Council’s recommendation, small cars that are under 4 meters in length and have an engine capacity no larger than 1200 cc (petrol) or 1500 cc (diesel) will now be taxed at 18%, a decrease from the previous rate of 28% plus an additional cess. Larger cars will, however, be taxed at 40%, without any additional compensation cess levy.
