₹2,500 cr compensation cess on books of auto companies will lapse on this date

An estimated ₹2,500 crore accumulated compensation cess on the books of auto companies in India will lapse on September 22, when the GST 2.0 comes into effect. Currently, in the GST 1.0, automobiles are subject to a 28 per cent GST, which is the highest slab. On top of that, a compensation cess, ranging between one per cent and 22 per cent, is also levied on automobiles, depending on the type of vehicle. This eventually takes the total tax incidence on passenger vehicles to up to 50 per cent.

Under the current GST regime, depending on the engine capacity and length, as defined by the GST Council, the total tax incidence on passenger vehicles ranges between 29 per cent and 50 per cent. While the small petrol cars pay 29 per cent total tax, the SUVs pay 50 per cent. However, with the new tax structure slated to be effective from September 22, petrol and diesel cars with engine capacities of up to 1,200 cc and 1,500 cc, respectively, will attract 18 per cent GST. The passenger vehicles above those will attract a 40 per cent tax.

While the petrol and diesel cars with engine capacities of up to 1,200 cc and 1,500 cc, respectively, will be significantly cheaper with this move, the total tax incidence on the passenger vehicles above these engine displacements will also be lower than the current total tax incidence. Under the GST 2.0, the compensation cess on automobiles will cease to exist.

PTI has reported that auto companies in the country 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 report claims that the accumulated cess amount is about ₹2,500 crore, which will have to be reversed in the accounting books of companies if not allowed to adjust.

Under the GST law, companies can only adjust accumulated cess with their cess liability, just like taxes paid on inputs can be adjusted only against output tax liability.

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