Damani said the automotive industry is assessing the number of vehicles in the network that attract high cess.Carmakers and auto retailers may face a potential loss on more than 600,000 unsold vehicles due to a lack of clarity on the treatment of compensation cess of 1-22 per cent across vehicle categories under the current goods and services tax (GST) regime.
Automakers and dealers told ET the GST Act should be amended to abolish cess and a new mechanism put in place to accord credits for losses incurred after the proposed indirect tax revamp. This, they said, can be done at a special session or winter session of Parliament. The GST Council is to discuss changes to the levy in the next few days.
“At present, there is no statutory mechanism to recover unutilised GST compensation cess,” said Saharsh Damani, chief executive officer, Federation of Automobile Dealers’ Associations. “Unless these balances are explicitly transitioned into usable credits under CGST or IGST, auto dealers risk losing substantial sums locked in channel stock.” “While a complete abolition of cess would simplify compliance, any mechanism to refund or transition existing credits will require a legislative amendment,” said Damani.
Unused Balance
“This could take time as it needs Parliamentary approval,” said Damani of FADA. According to dealer estimates, passenger vehicle stocks in the channel are currently at more than 55 days or about 600,000 units. The industry retailed on an average 327,419 vehicles each month during April-July.
Damani said the automotive industry is assessing the number of vehicles in the network that attract high cess. This will help estimate the potential working capital exposure if transitional safeguards are not provided. “It is imperative that the government ensures a seamless migration of these balances to protect dealer viability during the shift to GST 2.0,” he said.
The GST Council, apex decisionmaking body for the indirect tax, is slated to meet September 3-4, to discuss the Centre’s proposal to lower the levy on small cars to 18 per cent , from 28 per cent . Larger cars and SUVs are likely to face the special rate of 40 per cent , compared to 43-50 per cent tax, including GST and cess, currently. GST 2.0 entails moving to a twoslab structure of 5 per cent and 18 per cent , scrapping the existing 12 per cent and 28 per cent slabs and compensation cess, and introducing a 40 per cent special rate for sin goods and certain high-end products such as luxury automobiles. Opposition-ruled states have, meanwhile, expressed concerns of revenue loss due to the latest GST reform.
Auto industry stakeholders have reached out to the government suggesting measures such as permitting utilisation of unutilised compensation cess balances, including those linked to transitional stock and credit notes towards discharging output GST liabilities—IGST, CGST, SGST. In case such an adjustment is not possible, the industry has urged the Centre to set up a mechanism for full refund of unutilised compensation cess balances with defined timelines.
It has also requested the Centre recognise cess adjustments arising from sales returns and post sale discounts through credit notes, and allowing such neutralisation through adjustments or refunds, people in the know said.
In their representation to the Centre and the GST Council, executives said, “Since the current provisions do not allow the offset of compensation cess credit against GST liabilities, these balances (in compensation cess on vehicles in stock or in transit) would remain blocked. The issue also impacts stock transfers from factories to inter-state stockyards, where compensation cess paid on such movements would also remain blocked.
Without an appropriate transition mechanism, the resulting financial impact on OEMs (original equipment manufacturers) and dealers will be severe.” A copy of the representation was reviewed by ET. Senior officials said a transition mechanism will be worked out. To mitigate the impact of any potential loss in cess, companies such as Maruti Suzuki and Mahindra & Mahindra (M&M) have already started limiting dispatches of larger vehicles that attract higher cess of 17–22 per cent .
“We are consciously not pushing dispatches of larger vehicles (during this transition) as they attract higher cess,” said Partho Banerjee, senior executive officer, marketing and sales, at Maruti Suzuki. “Dealers want to stock small cars, on which the cess is lower at 1 per cent .” At the country’s largest carmaker, while wholesale dispatches of utility vehicles like Grand Vitara, XL6, and Invicto fell by 14 per cent to 54,043 units in August, those of compact cars such as Baleno and Swift rose by 3 per cent to 59,597 units.
Maruti Suzuki currently has stocks of 48-50 days, Banerjee said. “With the final GST announcement approaching, we consciously decided to bring down the wholesale billing to minimise the stock being carried by our dealers,” Nalinikanth Gollagunta, CEO, automotive division, M&M, said. “We look forward to the GST rationalisation, which would be a demand driver through the festive season.”
