Automakers hit the brakes on deliveries as cess losses stall dealer inventories

What should have been a celebratory moment for the auto industry has instead triggered a short-term disruption with potential losses running into thousands of crores. The abolition of the Goods and Services Tax (GST) Compensation Cess from September 22 is being hailed as a long-term positive for demand and profitability in the automobile sector. However, the immediate fallout is far from smooth. Dealers have already paid the cess on existing inventory but cannot recover this amount. Dealers, who bear the brunt, are on edge. Retail sales have slowed sharply as buyers wait for price cuts, while dealers refuse fresh consignments of vehicles still carrying a cess element. At stake are an estimated 1.5 lakh large passenger vehicles (PVs) lying in yards, most of them subject to cess of 15%-22%. Federation of Automobile Dealers Associations (FADA) warns about INR2,500 crore hit on this inventory. The bigger the vehicle, the bigger is the hit. A Toyota Fortuner priced at INR52 lakh carries around INR7.5 lakh in cess already paid to the exchequer – money that will be impossible to recover once the tax vanishes. Automakers have responded by halting dispatches. The complexity lies in the tax structure: dealers pay GST and cess upfront to manufacturers, who remit it to the government, recovering the amount from customers only when the vehicle is sold. While GST (rising from 28% to 40% on larger PVs post-September 22) can still be adjusted, the cess cannot. This leaves dealers saddled with unrecoverable outflows. Customers, of course, will not agree to pay cess after its abolition. “The industry needs clarity quickly. Dealers operate on thin margins and cannot carry this burden,” said a senior dealer-principal with a leading PV brand. OEMs (original equipment manufacturers) are caught in a bind. Without government relief, they must either absorb the hit. There is talk that they could try to clear inventory with steep discounts – both eroding margins just as the festive season was expected to lift sales. This is reminiscent of the BS6 (Bharat Stage 6) inventory losses in 2020. The Society of Indian Automobile Manufacturers (SIAM) has appealed for intervention. “We are confident that the government will also soon notify suitable mechanisms for the utilisation of compensation cess on unsold vehicles, ensuring a smooth and effective transition,” said Shailesh Chandra, president, SIAM. But tax experts warn the fix may not be simple. Unlike GST, cess cannot be adjusted or carried forward, and any refund would require fresh rules that could prove legally complex. In all likelihood, the burden will fall on automakers. The timing compounds the pain. Inventory has been built up for the festive season, when demand for big-ticket purchases usually peaks. Now, with buyers holding back for post-cess prices and dealers blocking new supplies, the market has ground to a standstill. A reform meant to reduce costs and spur demand has, ironically, frozen the industry. The government has so far been silent on the issue.