Compensation Cess on Automobiles to Cease from Sept. 22
The total tax incidence on cars, depending on engine capacity and length.
New Delhi: The government on Tuesday said that the compensation cess on automobiles will cease to exist effective September 22. Currently, automobiles are subject to GST at 28 per cent, which is the highest slab, and on top of it, a compensation cess ranging from 1 per cent to 22 percent is levied, depending on the type of vehicle.
As per auto industry estimation, there are over Rs 2,500 crore accumulated compensation cess on the books of auto companies, which will lapse after the new GST rates come into effect. “Compensation cess was imposed for a particular purpose...Once the levy is gone, whatever credit is lying, it will remain lying in their books,” Agarwal said at the NDTV Profit GST Conclave 2025.
“Whenever cess is discontinued. In the past, cesses have been discontinued. What happened in those cases? In those cases also, what was lying in the books could not be utilised because the levy itself is gone. The same thing has happened in the case of automobiles also, or maybe wherever cess is discontinued. It is not only an automobile, it is, in the case of aerated water, coal,” Agarwal said.
The total tax incidence on cars, depending on engine capacity and length, ranges from 29 per cent for small petrol cars to 50 per cent for SUVs. Effective September 22, petrol and diesel cars with engine capacities of up to 1,200 cc and 1,500 cc will attract 18 per cent GST, while those above that will attract the highest 40 per cent.
However, auto companies have flagged concerns related to accumulated cess in their books and have demanded either allowing it to be adjusted with their tax liability or a refund. “The accumulated cess is about Rs 2,500 crore, which, if not allowed to adjust, will have to be reversed in the accounting books of companies,” they said.
Explaining why the compensation cess was levied, the CBIC chief also said that it was initially imposed for 5 years of GST rollout till June 22 to compensate states for revenue loss. “However, to make up for the shortfall in revenue during Covid, the cess was extended to repay the loan of Rs 2.69 lakh crore that the centre had taken to compensate states for the loss of revenue suffered by them,” he said.
