Auto dealers knock SC’s door on compensation cess

After knocking the doors of Finance Ministry and Prime Minister’s Office (PMO), over ₹2,500-crore Compensation Cess on GST, Indian auto retailers have now approached the Supreme Court praying for refund of accumulated compensation cess credit.

The Supreme Court has issued notices to the Centre on a writ petition filed by the Federation of Automobile Dealers Associations (FADA) challenging the Centre’s notifications transition or refund of accumulated GST compensation cess credit that the industry associations have repeatedly estimated to be around Rs 2500 crore in value.

FADA also prayed for a writ, order or a direction declaring that the notification (Number 2/2025) issued by the Finance Ministry on September 17, 2025, be declared “arbitrary and unconstitutional” to the extent that it fails to provide for utilisation or refund of accumulated compensation cess credit.

The petition further prayed that the Court quashes or reads down two notifications (Numbers 2/2025 and 9/2025) as they result in the extinguishment of accumulated compensation cess credit without any transitional mechanism.

A division bench of the Apex Court comprising Justice Arvind Kumar and Justice N. V. Anjaria issued notices to the respondent Union of India on December 15. The respondents were asked to respond to the notices on March 25, 2026.

FADA India represents over 15,000 automobile dealerships having over 30,000 dealership outlets including multiple associations of automobile dealers at the regional, State and city levels representing the entire auto retail industry. They employ around five-million people at dealerships and service centres.

“The Court’s decision to issue notice is a significant procedural milestone. It ensures that the serious working-capital and constitutional issues faced by auto retail Micro, Small and Medium Enterprises (MSMEs) will now be examined at the highest judicial level. Auto retail industry is hopeful of a fair, balanced, and legally sound resolution,” one of the dealers told businessline on condition of anonymity.

Since the announcement of the GST 2.0 and proposals for rate rationalisation and the new tax structure of the GST Council on September 3, the auto retailers have been requesting the government to hold significant, validly-availed Compensation Cess balances in their electronic credit ledgers before even the new GST regime kicked off on September 22, 2025.

However, the government has not taken any step yet and therefore, FADA had to take it up to the Supreme Court, said another retailer adding that the dealers have prayed for refund of such credit under Section 54 of the CGST Act or any other suitable provision.

FADA in its letters to the FM and PMO in early September had said that once no further cess liability arises, the Compensation Cess balances in their electronic credit ledgers could not be utilised against CGST/SGST/IGST under the law and therefore, they wanted the Finance Ministry to transfer the balance lying in Compensation Cess Credit Ledger by September 21, to IGST/ CGST credit ledger.

“This is not a revenue give-away, but it is about preserving legitimate, tax-paid credits and preventing avoidable strain on both MSME dealers and the financial system,” the FADA letter dated September 5, had said.

The auto dealers argued that the GST framework is designed for seamless flow of credit and lapsing of cess balances would contradict this foundational principle.

“Dealers discharged cess on inward supplies with the legitimate expectation of utilisation. Denial now amounts to retrospective hardship,” the letter had added.

End

Published on December 22, 2025