🚗 When Taxes Turn into Dead Money: The Story Behind FADA’s Petition on GST Compensation Cess

Imagine paying lakhs in taxes every month, keeping every invoice perfect, and still being told one day —

“Your tax credit balance is now useless.”

That’s exactly what thousands of automobile dealers across India are facing today.

🔹 The Backstory — Why was this “Compensation Cess” collected?

When India introduced GST in 2017, it merged almost all indirect taxes into one.But States were worried they might lose their share of revenue.So the Centre promised — “Don’t worry, we’ll compensate you for any loss for the next five years.”

To fund this promise, a special tax was created:👉 GST Compensation Cess — levied on luxury and sin goods like cars, tobacco, aerated drinks, and coal.

So every time a car was sold, dealers and manufacturers collected and paid this extra cess.The money went into a Compensation Fund that was used to pay States for their revenue loss.

For example:

When a car was sold at ₹10 lakh, GST might be ₹2.8 lakh, and compensation cess another ₹1.5 lakh or more.

🔹 How dealers got trapped in their own tax credits

Dealers didn’t just pay the cess — they also received input tax credits (ITC) on it.This means if a dealer paid cess to the manufacturer while buying a vehicle, they could use that credit when selling to the customer.

So far, so good.

But under GST law, Compensation Cess ITC can only be used to pay output Compensation Cess, not GST (CGST/SGST).It’s like having a gift card that can be used only in one particular shop.

Now here’s where the problem starts — that “shop” is closing down.

🔹 GST 2.0 arrives, and the shop shuts

Under the new GST 2.0 reforms, the government is simplifying the tax structure.One big change — Compensation Cess is being phased out.

The purpose of that cess (to compensate States for revenue loss) has already ended.So, from the next phase, there will be no levy of this cess on car sales.

That sounds fine — until you realise dealers across India still have crores of rupees in Compensation Cess credit sitting in their ledgers.Now that the tax head itself is gone, they can’t use it anywhere.

Those credits become dead money — legally valid, but practically unusable.

🔹 How much money are we talking about?

According to the Federation of Automobile Dealers Association (FADA), dealers together have more than ₹2,500 crore of such unutilised compensation cess credit.

That’s not just numbers — it’s working capital.Money that could have gone into buying vehicles, paying staff, or servicing loans is now frozen in their GST ledgers.

And remember, 95% of dealer inventory is funded by banks or NBFCs.So every rupee of blocked credit increases their interest burden.

🔹 Why it can’t be simply carried forward or refunded

Here’s the tricky part — this cess isn’t part of the main GST law.It’s governed by a separate law called “GST (Compensation to States) Act, 2017.”

That law has a sunset clause. Once the cess period ends, the right to levy, collect, or even refund it also ends.

So, the government says:

“There’s no provision to carry forward or refund this balance. It just lapses.”

Dealers, on the other hand, say:

“But this is our money — earned credit from tax already paid! How can it just vanish?”

🔹 The legal fight begins — FADA goes to Supreme Court

In October 2025, the Federation of Automobile Dealers Association, along with eight automobile companies, filed a Writ Petition in the Supreme Court (Diary No. 60671/2025).

They have made:

• Union of India,

• Central Board of Indirect Taxes and Customs (CBIC), and

• GST Council

as respondents.

Their argument is simple:

• These credits are vested rights — part of their working capital.

• Blocking or extinguishing them without compensation violates the Right to Property (Article 300A) and Right to Equality (Article 14).

They aren’t opposing GST 2.0 — they’re just asking that their existing credits be either refunded or allowed to be adjusted against future GST liabilities.

🔹 What this means in simple words

Think of a prepaid balance on your phone — you’ve already paid for it.If tomorrow the telecom company shuts down that plan and says “your balance is gone,” you’d feel cheated.

That’s how dealers feel about their compensation cess credits.

They’ve paid tax, followed the rules, filed returns, and yet might lose the benefit of those credits simply because the law is changing.

🔹 The broader picture — when transition laws forget real people

Every big tax reform brings such transition issues.Earlier, we saw similar confusion when Service Tax credits were not properly carried forward into GST in 2017.

Now, under GST 2.0, the same story repeats.The law changes faster than the systems that run businesses.

When policies don’t allow a fair transition, honest taxpayers bear the brunt — especially small and medium dealers who depend on cash flow.

🔹 What could happen next

If the Supreme Court agrees with FADA, it could direct the government to:

• Allow refund of the unutilised compensation cess ITC, or

• Permit its adjustment against regular GST liabilities, or

• Create a one-time transitional provision under GST 2.0.

But if the court upholds the government’s stand, those credits — worth ₹2,500 crore — could permanently lapse.

Either way, this case will set a major precedent for how India handles tax transitions in future.

🔹 Final thoughts

Tax reforms should simplify life for businesses, not trap their hard-earned money in legal grey zones.GST 2.0 is a welcome move, but as the FADA case shows, policy transitions must also respect past compliance.

Because for every number in the ledger, there’s a business trying to survive, employees waiting for salaries, and customers depending on timely delivery.

When tax credits turn into “dead money,” it’s not just an accounting issue — it’s an economic wound.