NEW DELHI: The retroactive clarification issued by the GST Council regarding compensation cess is causing significant turmoil in India’s automobile sector as companies are now facing show cause notices demanding payment on past vehicle sales.
As per sources, carmakers have received tax notices worth Rs 10,000 crore for failing to pay compensation cess, which is part of the goods and services tax (GST), on utility vehicles sold prior to the issuance of clarification in 2022. This issue affects several popular models in the segment, including Mahindra’s Thar and Scorpio, Tata Motors’ Safari and Harrier, and Maruti’s Brezza, among others.
In 2022, the Council had issued a clarification about application of cess on all utility vehicles and SUVs with certain criteria for prior period. The companies are now getting the show cause notices.“The most damaging aspect of this retroactive application is that companies can’t pass the tax burden to customers. Vehicles have already been sold and automakers can’t go back and charge the cess to previous buyers,” said Abhishek Rastogi, founder of Rastogi Chambers.
Sudipta Bhattacharjee, partner with Khaitan & Co, said, “Unfortunately, the ghost of retrospective taxation seems to have reared its head yet again. The issue arises from an explanation of ‘ground clearance’ that was added post the 50th GST Council meeting – since it was added as an ‘explanation’ GST authorities appear to have taken a position that the same would be applicable retrospectively.”
“However, this position loses sight of the fact that the said explanation was recommended to be added in conjunction with the recommendation by GST Council to amend relevant rate entry in GST Compensation cess notification to include all utility vehicles in that entry – in other words, this was not an independent explanation but an explanation which was necessitated by the amendment and hence the explanation cannot be read independently, with retrospective effect. One hopes that the CBIC will issue suitable clarification to avoid retrospective liabilities on auto-manufacturers based on such a hyper-technical (and seemingly untenable) argument,” Bhattacharjee added.