GST reforms: New regime, but old problems persist for car dealers

With new GST rates kicking in, auto dealers face uncertainty on recovering compensation cess from unsold stock, even as OEMs cut prices to spur festive demand

As the new rates of goods and services tax (GST) become effective on Monday, car dealers are sitting on estimated inventories of 500,000 units, for which claiming the balance of the compensation cess is unclear.  At the beginning of September, dealers had an unsold stock of around 600,000 and around ₹4,000 crore of compensation cess paid on these vehicles. 

According to dealer sources, this has come down to 500,000. While the cess balance has not been accounted for, according to rough calculations the vehicles sold would roughly account for ₹500 crore-800 crore worth of that. This still leaves a significant amount of the cess balance to be recovered. 

During the final weekend, several dealers in the country tried to generate last-minute invoices on vehicles for retail, said dealer sources. 

“The worry is for high-value cars, for which the cess is higher. Dealers had resorted to discounting during September in order to clear some inventories. Not much has moved. There will be footfall in dealerships during the weekend as Pitru-Paksh ends as well now,” said a dealer who handles multiple brands of cars in eastern India.  

Sai Giridhar, vice-president, Federation of Automobile Dealers Associations (Fada), said he expected sales and footfall to pick up significantly from Monday. “Several vehicles are in transit now. Dealers have tried to sell as many vehicles as they could. We hope a resolution would be worked out for the cess balance.” 

Visits to two Mumbai dealers of Hyundai Motor India and JSW MG Motors on Saturday showed there was business as usual. The staff said while footfall and enquiries had picked up after the GST announcement, those had not translated into bookings.

The Hyundai dealership was bustling. A family was receiving its car while sales staffers were busy walking customers through different models, explaining their features and answering queries on discounts and prices. 

According to an MG Motor dealer, a surge in bookings and deliveries is expected from Monday.  

“We are having discussions with original equipment manufacturers (OEMs) on how best to navigate this challenge. We are also trying to have a word with the Centre through Fada. However, most OEMs say that they are awaiting clarity on the matter before some kind of financial assistance for dealers can be worked out,” said a Bengaluru-based dealer. 

He added OEMs had a significant exposure to the cess for cars that had not been billed but had been moved out of factories to yards.

“Some OEMs bill dealers and some bill their own sales companies, which bill dealers. In this confusion, several cars are not yet billed to dealers but the OEM has paid the cess on those,” he said, adding that there were several cars billed but not delivered. 

Luxury carmakers are trying to cushion the financial setback to dealers as the amount of cess on these high-value cars is running into a few lakhs of rupees per car. Dealers said OEMs like German luxury brand Audi were offsetting the compensation cess to dealers, and also holding billing them for more cars before the new rate kicks in. 

Balbir Singh Dhillon, head of the firm, told Business Standard: “We are working with our dealers to ensure a smooth transition. We understand there are short-term considerations around cess balances and inventories and we are engaging with all our stakeholders. With the new GST structure, Audi cars have become more accessible — our popular range has seen price reduction ranging from ₹2.6 lakh to ₹8.06 lakh. 

Mass-market OEMs like Maruti Suzuki India are making cars more affordable and attractive. On Thursday, it announced price cuts of up to ₹1.30 lakh across its models effective September 22, passing on full GST benefits along with additional reductions.  

Partho Banerjee, senior executive officer, marketing and sales, said the price cuts were significant particularly in the entry-level segment. 

“In the Alto K10, the reduction is in the range of 10.6-20 per cent; in the S-Presso, 12.6-24 per cent; for the Celerio, 8.6-17 per cent; and for Wagon R, 8.7-14 per cent. This is a double bonanza for the festival season,” he said.  

He added the company had passed on GST benefits not just on cars but also on service parts, with the aim of reducing the cost of ownership for customers.  

On the compensation cess paid by dealers on stocked vehicles, which cannot be claimed from customers following GST rationalisation, Banerjee said, “Different bodies are taking up the matter with the government. I think some solution will be worked out.” 

Maruti Suzuki sees pentup demand but Banerjee said that one should not read much into sales.