The Federation of Automobile Dealers Associations (FADA) has warned that the accumulation of over ₹2,500 crore in Input Tax Credit (ITC) linked to the now-abolished compensation cess following the rollout of GST 2.0 reforms is leading to a working capital crunch among automobile dealers and could soon disrupt credit cycles.
“If this money does not come back to the dealers, it will definitely impact their working capital. Most bankers have financed this amount. If you take a loan from a bank despite money lying with the government as credit balance in your books, it becomes a serious issue,” said Sai Giridhar, National Vice-President, Federation of Automobile Dealers Associations, and Director of Saisum Motors.
FADA has approached the Supreme Court challenging the accumulation of over ₹2,500 crore in compensation cess ITC. C S Vigneshwar, President of Federation of Automobile Dealers Associations, said the body has challenged the legality and constitutional validity of the compensation cess amendment.
According to FADA, the blocked credits are effectively locking up dealer capital at a time when margins remain thin and inventory costs are high. The industry body noted that dealers typically operate on leveraged balance sheets, with banks financing inventory and operational expenses.
“Around ₹3.5 crore is stuck for us. We are hoping for a favourable outcome from the court. Although we are managing for now, some smaller dealers are facing working capital challenges,” said Sabu Johny, Managing Director of EVM Group.
FADA also pointed out that unlike manufacturers, dealers do not have the flexibility to offset such losses as they have no control over vehicle pricing and therefore cannot pass on the burden by adjusting prices or levying additional charges.
“Since we don't manufacture products, we have no control over pricing. Our margins are wafer-thin and we cannot afford to lose this kind of money,” Giridhar said.
FADA cautioned that in some cases, as much as 10-15% of a dealer’s working capital may be locked in unutilisable credits, affecting cash rotation and day-to-day operations. The association fears that an adverse court ruling may force lenders to reassess these credits, which could eventually be written off.
“When auditors start pushing companies to write off inverted duty accumulation on account of input services, this could become a challenge. The cess has obviously served its purpose, so it had to be phased out. But what it means is that companies in the automobile space are sitting on hundreds of crores of accumulated GST compensation cess that is now effectively worthless. They cannot use it against any output liability,” said Sudipta Bhattacharjee, Partner – Indirect Tax at Khaitan & Co.
