NOVEMBER 12, 2025

From Eicher to Erasure: The Credit That Vanished

By Vijay Kumar

GOODS and Services Tax (Compensation to States) Act, 2017 was enacted to levy Compensation Cess for providing compensation to the States for the loss of revenue on implementation of GST. The input tax credit of Compensation Cess can be utilised only towards payment of the Compensation Cess on supply.

On 17.09.2025, the Government issued Notification No. 2/2025-Compensation Cess (Rate) amending Notification No. 1/2017 to prescribe Nil rate of cess on specified goods from 22.09.2025. Compensation Cess became nil in most of the cases and particularly in the case of automobiles, the subject of our story.

What about the credit already accrued and lying in balance as on 22.09.2025? This cannot be used for payment of any tax on outward supplies. Will the Government refund this or will it simply leave dealers staring at Rs.2,500 crores of unusable credit - a tax souvenir they never bought? These souvenirs don't sit on shelves - they sit in ledgers, gathering dust and resentment.

While the cess has been ceremoniously escorted out, it left behind a Rs.2,500 crore hangover for automobile dealers. The levy may be nil, but the misery is full. Credits that were supposed to drive affordability have stalled in the dealer's garage, mocking the idea that tax is never a cost. For dealers, GST 2.0 feels less like simplification and more like confiscation. GST 2.0 promised a smoother ride, but for dealers the engine has stalled with Rs.2,500 crores stuck in the tank.

Look at this discussion in our TIOL Tax Congress on 6th October 2025:

Moderator (Jai Kumar): When GST 2.0 was introduced, one of the big changes was the removal of the Compensation cess. But there's an issue: across the supply chain - at super stockists, dealers, distributors - there are accumulated credits of Compensation cess, estimated at around Rs.2,500 crores. Now, if one fine day this cess lapses, doesn't it increase the cost of vehicles, instead of reducing them? After all, this cess was duly paid to the government. In earlier regimes, accumulated credits were allowed to be utilized. Couldn't a similar mechanism be devised here - perhaps phased utilization over a few years? Otherwise, isn't this against the spirit of GST 2.0?

Sanjeev Agarwal (Industry - Automotive): This is indeed a concern. If the accumulated cess cannot be utilized or refunded, it becomes a cost. Dealers may be forced to adjust pricing.

Shashank Priya (Member GST, CBIC):

Compensation Cess was always meant to be at some point of time lapsing. So industry would have had already a road map to see how Compensation Cess will get used.

Now there are two options for the government. One would have been that we refund it or allow it as credit. But we have to also be mindful that government has already given up so much of its revenue. So it would be hard on the government to take this additional burden. It's all a matter of how much of revenue hit we are willing to take.

You have mentioned that it is a legitimate concern but one has to also balance the government's concerns for the revenue.

I must say and which I have said in earlier forums also; we have always been partners - industry and government both of us contribute towards the welfare of the society; so why should we not take it as a contribution of the industry towards GST 2.0; why don't they absorb this cost and not pass it on to the consumer. So that is the spirit that I would like to urge the concerned industries to adopt.

The Government frames it as contribution; the dealers experience it as confiscation. Two sides of the same coin - except this coin is worth Rs.2,500 crores.

The Auto Dealers don't seem to be in a mood for generosity. They tried all means but seems to have hit a dead end and so approached the Supreme Court.

The Federation of Automobile Dealers Associations (FADA) President in his message in their website states:

Highlighting the urgent need for relief due to the Nil-Rating of Compensation Cess and the simultaneous GST rate increase, FADA has submitted multiple representations to Hon'ble Prime Minister Shri Narendra Modi, Hon'ble Finance Minister Smt Nirmala Sitharaman, Revenue Secretary Mr Arvind Shrivastava, Chairman CBIC, and Hon'ble Union Minister of Commerce & Industry, Mr Piyush Goyal; Hon'ble Union Minister of Heavy Industries, Mr H D Kumaraswamy and Hon'ble Union Minister of Road, Transport & Highways, Mr Nitin Gadkari.

And Hon'ble Deputy Chief Minister of Bihar & Chairman of GoM-GST Council, Shri Samrat Choudhary.

While waiting for favourable response from the government, FADA has issued an advisory to members regarding Compensation Cess credit, requesting them to:

1. Maintain detailed reconciliations of Cess credit accumulated and the corresponding inward supplies on which such credit was availed.

2. Do not reverse or write off the balance lying in the Cess ECrL at this stage.

3. Avoid any voluntary reversals in GSTR-3B or manual adjustments in books until further communication is issued by the authorities or by FADA.

4. Retain complete documentation, including purchase invoices, ECrL statements, and reconciliations, to substantiate the credit position.

Reconcile, retain, resist reversal - in short, sit tight and pray - don't move, don't blink, and don't expect miracles.

In another message, he states:

In the evening, Mr Piyush Goyal, Hon'ble Union Minister for Commerce & Industry, delivered the keynote address. I highlighted the urgent need for clarity on Compensation Cess to avoid disruptions during the festive season, with potential dealer losses exceeding Rs. 2,500 crore. Mr Goyal assured support while urging OEMs to take shared responsibility.

He was referring to the 7th Auto Retail Conclave held on the 10th of September 2025. The caption of his message was - FADA Thanks PM for GST 2.0: Boost to Affordability & Auto Retail.

In the FADA journal of September 2025, there is an article by a CA and Advocate on this issue with suggested solutions.

The Problem:

With the implementation of GST 2.0, no scheme has been announced for the transition of credit lying in the Electronic Credit Ledger on account of Compensation Cess. Since there will be no liability on account of Compensation Cess on or after 22.09.2025, the balance in Cess ECrL will remain idle, without any avenue for utilization against future liabilities.

The balances in Cess ECrL represent cess already paid to manufacturers, which under the GST framework was always intended to be adjusted against the dealer's outward liability. By denying utilization, the Government effectively compels dealers to absorb this stranded cess into their cost base, with severe financial and legal consequences.

Nature of Cess ECrL Balances:

Every rupee in the Cess ECrL of a dealer corresponds to cess paid to the Original Equipment Manufacturer (OEM) at the time of purchasing vehicles. Dealers, acting strictly in compliance with the GST law, availed this amount as credit with the expectation of adjusting it against their outward cess liability at the time of sale to customers.

By barring utilization post 22.09.2025, the balances are transformed into an unrecoverable expense. This creates a situation akin to confiscation of Cess ECrL, since dealers are deprived of a right that had already accrued to them.

Fundamental Legal Issues:

- Violation of Value-Added Principle: GST's core promise is that tax is never a cost. By forcing cess balances into cost, the Government contradicts the foundation of the GST regime.

- Vested Right in Credit: Judicial pronouncements (e.g., Eicher Motors Ltd. v. Union of India, 1999; Dai Ichi Karkaria Ltd., 1999) recognize ITC as a vested right once lawfully availed. Denying utilization of Cess balances without statutory authority amounts to extinguishment of a property right.

- Article 265 - No Tax Without Authority of Law: Retaining balances without a statutory provision permitting their lapse may be unconstitutional, as it results in appropriation of money already collected as tax without legal sanction.

- Article 300A - Right to Property: Cess credit, once availed, constitutes a valuable property right. Its extinguishment without explicit legislative backing amounts to deprivation of property without authority of law.

- Article 14 - Equality: Dealers with high inventory are punished while those with lower inventory escape the burden. Such arbitrary differential treatment is vulnerable to challenge as discriminatory.

Transitional Mechanism:

- Utilization against other GST liabilities - Allowing dealers to adjust Cess ECrL against IGST or CGST liabilities in GST 2.0.

- Refund window - Permitting refund of accumulated balances within a defined timeframe.

Either of mechanisms are administratively feasible through amendments in the GST law and GSTN systems.

The Advocate concludes:

- The withdrawal of Compensation Cess marks an important milestone in India's GST journey. While its removal simplifies the tax structure and reduces the burden on end consumers, the failure to provide for utilization of Cess ECrL balances disproportionately harms automobile dealers holding large inventories.

- For these dealers, stranded balances represent direct losses, margin erosion, working capital stress, competitive disadvantage, and even risk of business survival.

- If GST is to remain faithful to its design as a tax only on value addition, the Government must urgently notify a transitional mechanism, whether in the form of utilization or refund. Without such relief, a reform intended to simplify and rationalize taxation may instead result in inequity, litigation, and financial stress concentrated on one of the most vital links in the automobile value chain, the dealer network.

So, the law books say, 'vested right'; the ledgers say, 'stranded asset'; and the dealers say 'confiscation'. Three languages, one meaning.

Obviously, nothing happened - And so the FADA took the case to the Supreme Court, where it is pending as Diary No. 60671/2025 and is currently under Defect List.

Of course, the Supreme Court is not the final stop. In Eicher Motors, the Court gave credit its due - and Government promptly got enacted a retrospective law to snatch it back. In taxation, court victories can always be legislated away. The stranded credit could be officially erased.