The 56th GST Council meeting brought with it a wave of rate rationalisations, including the removal of Compensation Cess on several goods, notably in the automobile sector. While the industry welcomes tax relief, this policy shift has introduced complex transitional challenges – especially concerning the reversal of Input Tax Credit (ITC) on goods that will become exempt post-22nd September 2025. One pressing concern pertains to the quantum of ITC to be reversed by auto dealers for stock-in-hand on the date the exemption takes effect. This raises a critical interpretational issue under Section 18(4) of the CGST Act: should dealers reverse only the ITC balance lying in the credit ledger on the day of exemption, or the entire ITC originally availed on such stock? The answer to this will determine the financial and compliance impact for the entire automobile distribution ecosystem.
1. Facts explained by way of example:
ABC Ltd is dealing in Luxury Cars and has stock of 100 such cars with it on 22nd Sept morning. On Purchase of these 100 cars he had availed ITC of 1 crore worth of Compensation cess. It utilised 80 lac worth of ITC of Cess in its regular course of business and only has 20 lac Cess ITC in its electronic credit ledger on 22nd Sept morning. Luxury cars stand exempt from levy of Cess from 22nd Sept.
2. Question that arises
Whether these taxpayers are required to reverse:
A) ITC only to the extent which is lying in their Electronic Credit Ledger on 22nd September
OR
B) they are required to reverse entire ITC which was originally availed on the goods lying in stock on 22nd September.
3. Legal Provisions and FAQ issued
Section 18(4) of the CGST Act reads as follows:
18 (4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption:
Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.
Relevant abstract / version of above provision would read as follows:
18 (4) Where any registered person who has availed of input tax credit where the goods supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock on the day immediately preceding the date of such exemption:
FAQ issued after 56th GST Council meeting in point no 9 – this issue has been covered:
My outward supply is exempt under new rate schedule. But I already have ITC of GST paid in my ledger. Will I need to reverse ITC?
The ITC can be utilized to discharge outward liability for supplies of goods/services or both made till 21st September, 2025. However, for supplies made on or after i.e 22nd September, 2025 when the rate change is effected, ITC will have to be reversed as per provisions of CGST Act, 2017.
4. Probable Impact
Currently entire trade understands that any ITC lying in balance on 22nd Sept will lapse and therefore would be required to be reversed only to that extent. However, on literal interpretation of section 18(4), it could mean that the taxpayers are required to calculate original ITC which was availed on stock lying in hand on 22nd September and reverse the same either by debiting available ITC or by paying in cash.
In given example, auto dealers would be required to reverse entire 1 crore of Cess ITC originally availed even though he had legitimately availed the ITC when the product was taxable and also utilised it legally in compliance with section 49.
5. Judicial Precedent
There have been judgements in the past which say that ITC once legitimately availed goes in the common pool and cannot be demanded back if the goods or services become exempt later on. Gujarat High Court in the case of Alembic Ltd has ruled on this line.
6. Clarification sought
Clarification on this issue is required to be issued at the earliest, media reports quote a figure of 2500 Crores of cess being the impact on the Auto dealers, some quote a figure of 4000 crores. Same issue of Cess ITC reversal is being faced by coal and beverages industry. If entire ITC availed on stock in hand is required to be reversed, then this figure would be much more then what has been reported.
To overcome this grave issue we request to issue a Removal of Difficulty Order u/s 14 of Goods And Services Tax (Compensation To States) Act, 2017 read with Section 172 of the CGST Act, 2017 and provide for
- Non application of section 18(4) on goods on which compensation cess has been abolished.
- Transition of Cess ITC lying in Electronic Credit ledger and allow it to be utilised against regular GST liability post 22nd September 2025.
In light of the above, it becomes imperative for the GST Council or the CBIC to issue a timely clarification, either through a Removal of Difficulty Order or a specific Circular, to ensure uniformity in interpretation and avoid large-scale disputes. The current ambiguity, if left unaddressed, could translate into massive financial outflows for the industry, with estimates suggesting a reversal impact upwards of ₹4,000 crore. Given the legitimate availing and utilisation of ITC under the law when the goods were taxable, a pragmatic solution that avoids retrospective hardship is essential. The principle of certainty in tax policy must prevail – especially when the industry has acted in good faith and in compliance with the provisions of the law.