Fada Urges PM Modi to Address Compensation Cess Concerns Before GST Phase Two
The Federation of Automobile Dealers Associations (Fada) has reached out to Prime Minister Narendra Modi, urging for a solution to the pressing issue of the compensation cess before September 22, which marks the commencement of the second phase of the Goods and Services Tax (GST). The automobile industry is bracing for a significant impact, with an estimated loss of ₹2,500 crore anticipated due to the removal of the compensation cess on high-end vehicles.
In a letter addressed to Modi on September 8, Fada requested that the balance in the compensation cess credit ledger as of September 21 be transferred to the credit ledger of integrated GST/Central GST. Such balance may then be utilised for the discharge of regular GST liability (CGST/SGST/IGST),” the letter stated. It emphasized that GST 2.0 represents a transformative reset aimed at simplifying processes for citizens and small businesses.
The letter also highlighted the critical need for a clean transition regarding compensation cess credits, which would ensure a seamless implementation while sustaining confidence among micro, small, and medium enterprises (MSMEs). CS Vigneshwar, president of Fada, noted, “A small administrative step now will unleash the full multiplier effect anticipated.
Currently, automobile dealers are managing an inventory of approximately 600,000 vehicles, stockpiled in preparation for the festival season. Fada previously approached Union Finance Minister Nirmala Sitharaman with the same request to safeguard their sales from being adversely affected.
The letter pointed out that auto dealerships across India hold substantial, validly availed compensation cess balances in their electronic credit ledgers. Under the existing regulations, these balances cannot be applied against CGST/SGST/IGST and will become void unless a transitional pathway is established. This situation effectively transforms legitimate, tax-paid credits into dead capital, especially critical as the festive season approaches.
The systemic implications of this situation are severe, as over 95 percent of dealer inventory is funded through bank loans. If these credits become unusable, it could lead to reduced borrowing capacity, increased interest costs, and strained covenants, precisely when the industry is ramping up stock for deliveries in the September-to-Diwali period.
Fada reiterated that this issue is not merely about revenue loss; it’s about preserving legitimate, tax-paid credits and preventing unnecessary strain on MSMEs and the financial system. Furthermore, it was noted that by abolishing the cess and rationalizing rates, GST 2.0 has made mass mobility—such as small cars, two-wheelers, commercial vehicles, and tractors—8-12 percent more affordable, thereby catalyzing demand, formalization, and job creation. Early analyses indicate a potential 8-10 percent uplift in volumes by 2025-26, aided by reduced logistics costs, as buses and trucks transition to an 18 percent tax rate.