The Federation of Automobile Dealers Associations (FADA) has raised a red flag over the government’s plan to revamp taxes in the automotive sector from September 22. According to the industry body, auto dealers may face losses of up to ₹2,500 crore if there is no clarity on how to handle compensation cess credits currently lying in their books.
These credits represent taxes already paid on vehicles in inventory, particularly high-value models such as SUVs, which are taxed heavily under the current system.
At present, dealers are sitting on nearly 55 days of unsold vehicle stock. Many of these vehicles were taxed at 28% GST plus a compensation cess of 17–22%, pushing the effective rate close to 50%. With the cess set to be scrapped under the new rules, FADA fears that dealers may not be able to offset the credits already booked, creating a mismatch that could wipe out crores in value.
FADA president CS Vigneshwar underlined the urgency of the issue, saying one of the first things the government must clarify is how existing cess balances will be treated once the new rates kick in. Without this, he argued, ambiguity could cause confusion during the transition.
The timing is critical, as the auto industry is preparing for the peak festive season. Traditionally, this is the period when dealers record their strongest sales, and a glitch in the tax transition could blunt the expected boost in demand.
Under the new structure, the government plans to simplify tax slabs in the automobile sector. Small cars—defined as petrol, LPG or CNG vehicles up to 1200 cc and 4000 mm, and diesel cars up to 1500 cc and 4000 mm—will see their GST rate drop from 28% to 18%. Motorcycles up to 350 cc, three-wheelers, commercial vehicles such as buses and trucks, ambulances and all auto parts will also be taxed at 18%.
Tractors and their tyres and parts will benefit from a sharper cut, moving down to 5% from 12–18%. Electric vehicles will continue at 5%, in line with the government’s push for electric mobility.
On the other hand, mid-size and large cars with bigger engines or dimensions—including SUVs, MUVs, MPVs and XUVs with ground clearance above 170 mm—will now attract 40% GST. Motorcycles above 350 cc and luxury assets such as helicopters and yachts will also fall under this higher bracket. While this rate is lower than the earlier effective burden of 45–50%, the removal of the cess could leave dealers stuck with unused credits.
FADA has broadly welcomed the new tax structure, calling it a positive move that will make vehicles more affordable and stimulate demand. The association credited the prime minister, finance minister and GST Council for pushing through the reform. But Vigneshwar added that the real test lies in glitch-free implementation. Unless the issue of cess credits is addressed, the benefits of lower taxes may not seamlessly pass on to buyers, especially during the festive season when expectations of discounts and affordability run high.
