India's automobile dealers have raised concerns over a potential Rs. 25 billion (US$ 300.2 million) impact from cess already paid on festive season passenger vehicle inventory, warning that blocked credits could constrain working capital.

This follows the Goods and Services Tax (GST) Council, chaired by Finance Minister Nirmala Sitharaman, reducing GST rates on small cars, two-wheelers up to 350cc, and other vehicles from 28% to 18%, while also removing the associated cess from 22nd September.

Saharsh Damani, CEO of the Federation of Automobile Dealers Associations (FADA), noted that the primary challenge for the auto retail sector lies in the cess amount on already purchased inventory.

According to Damani, the cumulative blocked cess on passenger vehicles amounts to nearly Rs. 25 billion, with this estimate excluding two-wheelers above 350cc.

From 22nd September, GST on small cars, motorcycles up to 350cc, three-wheelers, buses, trucks, and ambulances will be reduced from 28% to 18%. The associated cess, which ranges from 1% to 22% across different passenger vehicles, will also be removed.

Dealers remit cess on wholesale purchases from OEMs and recover it at the retail stage. Under normal operations, GST and cess are paid when vehicles are purchased from manufacturers and subsequently collected from customers at the point of sale.

This system can result in blocked credits until they are offset. Damani explained that even if sales increase, the cess amount remains blocked and does not provide immediate financial benefit to dealers.

Customers will not experience an increase in prices; however, dealers will bear the impact. Vehicles purchased at one rate must be sold at another following the cess removal, creating a financial gap borne by dealers.

Legally, this amount remains the property of the dealer. Resolution would require either a government refund or a legislative amendment allowing adjustment of the blocked cess against CGST or IGST. Damani noted that such a change would require a parliamentary amendment, which could be addressed in a special session or the winter session of Parliament.

Working capital constraints

While the rate reduction is expected to influence sales in the mass-market segment, blocked credits are likely to strain working capital during the peak festive season.

FADA highlighted that a significant portion of annual sales typically occurs during this period, when inventory levels are high and channel funding exceeds average levels.

Unadjusted cess could therefore increase leverage and limit dealers' financial flexibility.

There is also a risk of defaults. Dealers unable to repay bank tranches on time may face penalties, weakening their capital position. The blocked cess balance may effectively become unusable, potentially resulting in financial loss.

Potential impact on deliveries

The GST adjustment coincides with Navratri, a period traditionally preferred for vehicle purchases. Dealers may face difficulties in meeting demand due to uncertainties regarding cess adjustments.

In some cases, orders could be withheld, leading to delivery delays and preventing customers from receiving vehicles as scheduled.

Sectoral context

The GST transition occurs at a challenging time for the auto sector. In August 2025, major carmakers reported declines in domestic sales as dealers delayed purchases pending tax reductions.

Dealers expect that the GST changes may influence affordability for consumers in the mass-market segment.