Auto dealers holding accumulated Compensation Cess credit on unsold vehicles will not be able to set it off once the new GST rate structure comes into effect from September 22, clarified Central Board of Indirect Taxes and Customs (CBIC) Chairman Sanjay Kumar Agarwal.
During a media interaction, Agarwal addressed concerns raised by dealers who had already received vehicles from manufacturers on which GST and Compensation Cess were paid at the time of clearance. With the festive season approaching, many auto companies had dispatched vehicles to their dealer networks in anticipation of demand.
Explaining the situation, Agarwal said at the time of clearance from the factory, cars attracted GST along with Compensation Cess. Dealers availed Input Tax Credit (ITC) on both.
However, when these cars are sold on or after September 22, the applicable tax will only be GST—either at 18% or 40% depending on the vehicle segment. No Compensation Cess will be levied. This means dealers can use GST ITC for their output liability, but any accumulated Compensation Cess credit cannot be utilized and will lapse.
He further added that while dealers may perceive this as a loss, technically it is part of the transitional effect of tax restructuring. “Whenever goods undergo rate restructuring, such situations arise. If a levy existed earlier but was withdrawn later, the corresponding ITC lapses. This is a natural outcome of the transition,” Agarwal stated.
Industry experts note that while the clarification provides certainty, dealers with large inventories may face working capital pressure as their Compensation Cess credit remains blocked.
The announcement comes at a critical time, as the auto sector is banking on festive sales to boost volumes after a slow start to the financial year.
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