GST 2.0’s bumpy ride: Stuck with old stock, car dealers face Rs 2,500 crore loss in cess

While the GST overhaul has reduced the rates on several cars and also done away with the compensation cess, which is expected to make cars cheaper, dealers who have requisitioned the cars from manufacturers at the older rates have paid GST and cess on it. Those cars now – which dealers had stocked up due to the incoming festive season – are proving difficult to sell, as customers are unwilling to buy cars at the older rate. As a result, they are having to offer a discount on those cars out of their own pockets, with estimates suggesting that they could be staring at losses of Rs 2,500 crore, eroding their working capital. They are unsure whether there will be some relief in terms of refunds, and where it might come from.

In a letter to Finance Minister Nirmala Sitharaman Monday, the Federation of Automobile Dealers Association (FADA) said that dealerships were “extremely anxious”. “While GST 2.0 subsumes the earlier Compensation Cess regime for automobiles, dealers today hold significant, validly-availed Compensation Cess balances in their electronic credit ledgers. Once no further cess liability arises, these balances cannot be utilised against CGST/SGST/IGST under the current law. Without a transitional pathway, credits risk lapsing, creating an unintended, permanent loss and a sharp working-capital shock for compliant MSME dealerships,” FADA said.

As The Indian Express visited several showrooms of major automakers, the common thread running across the auto dealerships was of the inability to give deep discounts beyond those announced by the company and the dealerships having stopped buying cars from the manufacturers till their old stock gets cleared. At a Hyundai showroom in South Delhi, the store manager said they are offering two rates to consumers — pre- and post- September 22 rates. Discounts have, in fact, reduced for cars that are already in stock, the manager explained.

“Usually, we dealers give a discount of Rs 30,000-70,000 based on the car model. But now since dealers have to take the hit because of the cess under the older GST rate system, the approximate net hit per car is turning out to be Rs 30,000-40,000. So, discounts are being reduced accordingly by dealers,” the manager, who did not wish to be named, said.

The dealer has stopped buying cars from Hyundai till his old stock of around 250 cars gets sold even as the manufacturer has brought in cars from its Chennai plant and kept at the company’s stockyard in Farukhnagar, Gurugram. “We are not billing for any new cars till our old stock gets cleared,” the dealer said.

Across the road, a Maruti Nexa showroom was also empty, with the store manager saying this could be perhaps one of the worst OND months (October-November-December) seen by him in terms of car sales in the last four years. Post the announcement of GST 2.0 rate cuts, buyers are now coming to the showroom demanding deep discounts, with some even telling them that the cost of car manufacturing has reduced for automakers due to a lower tax rate for auto parts and hence, there should be more discounts, the manager said. “But, a car is not paneer (cottage cheese). It does not get made overnight, it takes several months to be manufactured, and there’s a value chain. Customers are coming to us and demanding price cuts based on GST cuts, they are saying the tax rate for auto parts has also come down, but it doesn’t work like that,” he said.

The Maruti dealership has over 1,200 cars stuck in the pipeline in the Delhi-NCR region, the store manager said, adding that they have stopped buying new cars from the company. Right now, the pricing to be offered to the company is tricky and they are telling consumers that there could be a variation of Rs 50,000-55,000 in the final price as even the road tax and insurance charges will change commensurate to the price change for the car. The Maruti dealership is offering discounts up to Rs 50,000- Rs 60,000 asking consumers to choose between the GST rebate or the discount by the dealer.

People had put their purchase decisions on hold in anticipation of the GST rate cuts and now the 15-day shraadh or pitru paksha period has also resulted in consumers not placing orders, the store manager at Maruti’s dealership said. The deferral of purchase orders may actually result in a compounding effect of further delays in sales, he said. “Most consumers realise that car dealerships are stuck with stocks. Since they know we have to clear the stocks, they are asking for bigger discounts and are willing to defer their purchase decision. I think there may be a case where the people who are deferring buying cars now may buy it on Diwali, and the buyers who buy on Diwali might push their purchase till year-end and the customers who might be thinking of buying it in December may defer it to next year,” he said.

The situation was, however, very different at the showroom of Mahindra, with 5-6 families having come in enquiring about the cars. While the dealership has a stock of 277 unsold cars, the showroom manager said they are seeing purchases, especially from Muslim and Sikh families even as Hindus are restraining from buying during the ‘shraadh’ period.

Mahindra’s dealership manager said they have a different car portfolio altogether — with most of their cars having engines over 1200 cc. The GST reduction is not as sharp for bigger cars as it is for smaller cars, the showroom manager said. “We have only one car 3XO that has a 1.2 litre engine, every other car is of bigger dimension or capacity,” he said.

The company has announced price cuts but the dealer said the discounts are going to be there only for the cars to be delivered by September 21. “We are offering discounts till September 21, there won’t be much discount after the new GST rates come in,” he said.

Under the next-generation reforms for GST (Goods and Services Tax) announced last week, small cars with engine capacity not exceeding 1200 cc (petrol) and 1500 cc (diesel) and with length not over 4 metre will now be in the 18 per cent slab against 28 per cent plus cess levy earlier. Bigger cars will be taxed at 40 per cent as against 28 per cent and additional compensation cess of 17-22 per cent, taking the total tax to 50 per cent in some cases. All automotive parts will now be taxed at 18 per cent.

The auto sector is now grappling with the problem of adjusting the cess charged on vehicles which have moved out of the factory gates and have reached the dealerships, but will likely be sold only after September 22 when the cess is technically done away with. The mechanism to adjust the cess already paid is now a festering issue. The transitional issues arising out of GST 2.0 were taken up for discussion at an inter-ministerial meeting on Monday.