A: Preface
There has been a significant decline in net GST including Cess rate vide 56th GST Council Meeting. Subsequent to 56th GST Council Meeting; Notification number 9/2025 has been notified on 17th September to be effective from 22nd September’2025 stating revised GST rates covering all items including Automobiles. Notification 9/2025 supersedes age-old Notification no. 1/2017 dated 1st July, 2017. Also, Notification 2/2025 have been issued in regard to Compensation Cess which amends Notification no. 1/2017 of Compensation Cess (Rate).
Although no rationale has been provided behind choosing 22nd September as the effective date but it coincides with beginning of Festive Season being the first day of Navratri and Durga Puja.
The summarised rate structure of Motor Vehicles is under:
| Type of Vehicles | Rates before 22nd Sept’25 | Rates from 22nd Sept’25 | ||||
| GST | Cess | Effective | GST | Cess | Effective | |
| Small Cars | 28% | 1% – 3% | 29% – 31% | 18% | Nil | 18% |
| Sedan and Luxury Cars | 28% | 15% – 22% | 43% – 50% | 40% | Nil | 40% |
| Electric Vehicles | 5% | Nil | 5% | 5% | Nil | 5% |
Note: Small Cars, Sedan and Luxury Cars have been categorised for convenience purposes and are named distinctively in notification.
B: Transitional Chaos
The significant decline in the GST rates for Motor Vehicles has been welcomed by the Industry and also by Public at large. Cess has been removed from Motor Vehicles; and in technical language, it has been made Nil Rated. Yet, the lack of transitional provisions in respect of Cess has brought in mess for automobile dealers. Till the time of release of this article, no transitional provisions have been announced by the Government.
With the cess rate being Nil for Motor Vehicles, many queries and much confusion have arisen, such as
1. What will happen to Cess lying in Electronic Ledger as on 21st September’25
2. Can the Cess Input be set off with IGST, CGST or SGST liability
3. What will happen to Cess paid on purchase of unsold goods
4. Can the cess be refunded?
5. Can the cess lying in electronic ledger be carried forward
C: Statutory Touchnote
It is noteworthy that Cess is governed by a Separate act named “Goods and Services Tax (Compensation to States) Act 2017 herein after referred as “GST Compensation Cess Act”. It is also important to note that this Act has not been repealed and majority of goods that were subject to Cess has been categorised as Nil rated. Hence, it is important to delve into the provisions of this act.
Section 11 of the GST (Compensation to States) Act reads as follows:
11(1) The provisions of the Central Goods and Services Tax Act, and the rules made thereunder, including those relating to assessment, input tax credit, non-levy, short-levy, interest, appeals, offences and penalties, shall, as far as may be, mutatis mutandis, apply, in relation to the levy ad collection of the cess leviable under section 8 on the intra-State supply of goods and services, as they apply in relation to the levy and collection of central tax on such intra-state supply of goods and services, as they apply, in relation to the levy and collection of central tax on such intra-State supplies under the said Act or the rules made thereunder.
11(2) The provisions of the Central Goods and Services Tax Act, and the rules ……………………
Provided that the input tax credit in respect of cess on supply of goods or services leviable under section 8, shall be utilised only towards payment of said cess on supply of goods and services leviable under the said section.”
It is pertinent to note that GST Compensation Cess Act does not specifically deal with the Input Tax Credit. Since the provisions of CGST & IGST Acts shall apply mutatis mutandis to Cess, hence, we need to delve also into the CGST Act wherein Section 18(4) of the Central Goods and Services Tax Act, 2017 is read as under:
“18(4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption:
Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.”
The provisions of Section 18(4) shall apply if the goods (Motor Vehicles in the present context) are wholly exempt. Hence, the discussion henceforth will primarily be made in evolving the status of taxability of Motor Vehicle as wholly exempt or not from Cess Point of view.
D: Varied School of thoughts
There are two school of thoughts in this pretext.
Perspective 1:
The Motor Vehicle shall be considered as exempt if read only from the perspective of GST Compensation Act and If the Motor Vehicle is considered to be wholly exempt; then the ITC availed on Compensation Cess on the Motor Vehicles lying as on 21st September’25 shall have to be reversed. Even if after such reversal, if balance lies in Electronic Credit Ledger; such amount also needs to be reversed.
Perspective 2
The Motor Vehicle shall not be considered as exempt as the product is Taxable as per prevailing GST Laws. The taxability of the product has to be seen on a global basis. Since the Product is taxable at the rate of 18% or 40%; the Motor Vehicle is not exempt goods for the purpose of invocation of Section 18(4) and hence no reversal of any kind is required. Under such circumstances, the balance lying is Electronic Credit Ledger in Cess shall continue to be carried forward. The fate of such carry forward shall be decided in future. These credits can be set off with Cess output only but presently there is no cess on any Motor Vehicle wef 22nd September, 25. Hence, the ITC lying in Electronic Credit Ledger shall be blocked in the ledger and will impact Working Capital of the dealers of Motor Vehicles.
E: Opinion
Perspective 2 as discussed above, seems to be more appropriate in the given circumstance. The reason is being discussed now.
GST (Compensation to States) Bill, 2017 was introduced in Lok Sabha along-with other GST Acts i.e. CGST Act, UTGST Act and IGST Act. These 4 Acts were tabled simultaneously by the then Finance Minister and these all 4 Acts complement each other in various ways. All these acts were tabled on the recommendation of the GST Council. In furtherance, GST (Compensation to States) Act, 2017 is completely dependent on various provisions of CGST Act and IGST Act. These four acts are normally referred as Sister Acts. Hence, the Exempt or Taxable status of any product must be looked on a Global Basis.
18(4) of the CGST Act, 2017 shall be applied only when the product is Wholly Exempt and hence, we need to delve into the definition of Exempt Supply.
Section 2(47) defines ‘exempt supply’ as under:
“ ‘exempt supply’ means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;”
Exempt Supply is the supply on which nil rate of tax is imposed. ‘Tax’ has not been defined exclusively in any of the referred acts but it includes IGST, CGST, SGST and Cess as well. To categorise a product to be Wholly Exempt, it needs to be ensured that it is nil rated or exempt in all Acts. Motor Vehicle is taxable post 22nd September’25 as IGST, CGST and SGST remains payable as Output Tax. Attention in this respect is also derived to the prefix of exempt in section 18(4) i.e. wholly exempt. It is noteworthy that ‘Wholly’ Exempt has not been specifically defined and hence wholly has to be interpreted as wholesome in all respect. With this, it can be safely derived that supply Motor Vehicle cannot be categorised as wholly exempt supply.
Continuing with the concluded opinion that the Motor Vehicle is not Exempt even for cess for the limited applicability of Subsection 4 of Section 18 of CGST Act, the standing lies as under:
- No reversal or payment of Cess for the Stock Lying as on 21stSept’25
- ITC lying in Electronic Credit Ledger shall remain in Credit Ledger and is not required to be reversed as Section 18(4) is not applicable
- The carried forward Electronic Credit Ledger of Cess shall have no usage as per present rules. The same shall remain blocked as working capital with no certainty of its utilisation in future.
F: Natural Injustice to Automobile Dealers due to lack of Transitional Provisions
Automobile Dealers have certain stock of Motor Vehicles purchased at payment of higher rate GST which shall be sold at lower rate of GST and vice versa. This will not cause any loss to automobile dealers as they will be entitled to ITC of higher rate of GST paid. This may lead to blocking of working capital to some extent but will not impact their P&L at large. However, Cess paid on purchase cannot be set off irrespective of having balance in Credit Ledger in want of any output liability of Cess post 22nd September’25 onwards.
Emphasis on the context is supplied that GST rate of all high Cess (15% – 22%) Motor Vehicles have been enhanced from 28% to 40%. In other words, some portion of Cess collection have been subsumed in GST by enhancing GST Rate.
It is noteworthy that the prices of the Motor Vehicles shall be reduced considering the new GST rate as the new GST rate is lower than old GST plus Cess Rate. While Automobile Dealers shall get ITC of GST (IGST, UTGST, CGST & SGST) but they will effectively not able to utilise ITC of Cess. This shall create huge loss to Automobile Dealers for which no clarification has yet been issued by the Ministry or Council or Board.
Let us understand the scenario with an example wherein the Motor Vehicle is purchased @10 Lacs pre GST and sold @10.50 Lacs pre GST; the cess of which prior to 22nd Sept’25 is 15%. The rate of GST prior to 22nd Sept’25 is 28% and revised from 22nd Sept’25 as 40%.
| Particulars | Scenario 1 | Scenario 2 | Scenario 3 | |
| Purchased before 22nd Sept’25 and sold before 22nd Sept’25 | Purchase after 22nd Sept’25 and Sold after 22nd Sept’25 | Purchased before 22nd Sept’25 and sold after 22nd Sept’25 | ||
| Purchase Price before GST
|
A | 10,00,000 | 10,00,000 | 10,00,000 |
| GST Amount @28% or 40%
|
B | 2,80,000 | 4,00,000 | 2,80,000 |
| Cess @ 15%
|
C | 1,50,000 | 0 | 1,50,000 |
| Net Purchase Price
|
D | 14,30,000 | 14,00,000 | 14,30,000 |
| Sale Price before GST
|
E | 10,50,000 | 10,50,000 | 10,50,000 |
| GST Amount @ 28% or 40%
|
F | 2,94,000 | 4,20,000 | 4,20,000 |
| Cess @ 15%
|
G | 1,57,500 | 0 | 0 |
| Net Sale Price to Customer
|
H | 15,01,500 | 14,70,000 | 14,70,000 |
| Gross Profit
|
50,000 | 50,000 | 50,000 | |
| Cess Input stranded
|
0 | 0 | 1,50,000 | |
| Net Margin / (Loss) to Dealer | 50,000 | 50,000 | (1,00,000) | |
| Net Collection of Tax by Government | 2,94,000
+ 1,57,500 = 4,51,500 |
4,20,000
+ 0 = 4,20,000 |
4,20,000
+ 1,50,000* = 5,70,000 |
*since this amount of Rs. 1,50,000 cannot be utilised for further set off, this amount is additional cess collected by government.
As it is evident that because of GST cum Cess revision; the price of Motor Vehicle to end-consumer has decreased from 15.01 Lacs to 14.70 Lacs. The profit of the dealer shall remain constant as Rs. 50,000 if bought and sold prior to or after the cut-off date. However, for the dealer who have stock in hand (Scenario 3 above), he will suffer a loss of Rs. 1 Lac for no fault of himself. It is clearly evident that Government is getting higher amount of tax in Scenario 3 which is nothing but double taxation.
This issue needs immediate redressal by the Government. There is lack of Transitional Provision which, if not introduced, may lead to litigation invoking Article 14 of Indian Constitution on equality besides other statutory footings and judgements.
G: Frequently Asked Question
1. What will happen to Cess lying in Electronic Ledger as on 21st September’25
Cess lying in Electronic Ledger as on 21st September’25 shall continue in Ledger with no roadmap of its set off in future. Working Capital shall be blocked; may be permanently. In any future scenario, if Cess is re-introduced then this amount can be utilised for set off. Ideally, this amount should be refunded by Government either in GST Credit/Cash Ledger or in Cash but there is no such provision momentarily.
2. Can the Cess Input be set off with IGST, CGST or SGST liability
No, the Cess Input cannot be set off with IGST, CGST or SGST liability.
3. What will happen to Cess paid on purchase of unsold goods
The Cess paid on purchase of unsold goods shall be availed in Electronic Credit Ledger and the balance lying in Electronic Credit Ledger shall remain stranded or blocked till a final clarification in this respect is issued.
4. Can the cess be refunded?
No, at present there is no provision of refund of Cess for the given circumstances.
5. Can the cess lying in electronic ledger be carried forward
Yes, the cess lying in electronic ledger can be carried forward but it cannot be set off as there is no output liability for Cess.
Food for thought
Interestingly, Government has replaced old Notification relating to rate of Goods (1/2017) by new Notification 9/2025 of Central Tax (Rate). However, old Compensation Cess (Rate) Notification no. 1/2017 has been amended by Notification 2/2025 In other words, there are rooms for re-introducing Cess rate on few of the Nil Rated (As per Cess) Goods.
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H: Disclaimer: The opinion given in article is as per interpretation understanding of the author which is subject to correctness. The author has largely relied on Perspective 2 as discussed above. If Perspective 1 is followed, the dealers will have to reverse entire ITC on unsold stock either from Electronic Cess ITC Ledger or from Electronic Cash Ledger and the loss to the dealer will be higher than what is illustrated above. The author’s firm may be serving few of its services to automobile dealers. The article is intended for academic discussion and should not be relied without seeking further legal advices and opinions from legal consultants.
Articled by: CA. Aditya Kumar Maheshwari | aditya@adityaca.com | 97330-44550
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