Compensation CESS ends in 2026 | What next for the car market?

Compensation CESS ends in 2026, What next for Car the Market?

To a purchase a new Motor vehicle in India, a Common man has to go through several ordeals and pains. One of them is the high tax that is charged on an average car.

For example- a Factory cost of 8 Lakhs on a SUV balloons past 14 lakhs in states like Karnataka due to high Tax structure
(28 percent GST + 20 Percent CESS + 17 Percent Road Tax)

This has always diverged India into a slow growing market against the potential it has

Ford has broadcasted Indian car market at 10 Million in 2020, it finally crossed 4 million in 2023

What is the GST Structure on Cars



GST on cars is levied at flat 28 Percent with varying CESS Rates

(Note: EV's are taxed at 5 percent)

Why the Compensation CESS?

The rationale behind the Compensation CESS was to give relief to the State's that were badly effected with introduction of GST, considering more than half the taxes were collected by state's in form of VAT.

It was originally proposed for 5 years till 2022 but got extended for another 5 considering the losses state's had to undergo in Covid because of the lack of economic activity

So come 2026, the Compensation CESS will expire and this means that there would be a vacant tax space for Government and it would have choices to make

The choices Government can make and my take on how likely it is to happen

1. Cars be taxed at flat 28 Percent (Unlikely): Without the compensation CESS, Cars will be taxed at 28 percent which will be a huge relief to both carmakers and buyers but this is unlikely to happen as this would mean 2 things
(a) Small cars will lose any edge they have
(b) Government will have a huge loss in revenue and it will take 2 years to get back to older levels of revenue

2. New Slab at 35 Percent for Cars above Sub 4m rule & Sub 4m cars be taxed at 28 Percent (Highly likely):
The Government may introduce a 35 percent slab for Cars and other luxury items where cars above sub 4m will be taxed at this slab where as the sub 4m cars will be taxed at 28 percent. This will provide impetus to cars above 4m as taxes will come down by 8-15 percent, thus pleasing the car makers and buyers, and also not let the losses get significant for Government (which they will recover through extra sales generated)

3. Compensation CESS be extended (Highly Unlikely):
Since the purpose of CESS will be served, any continuation will spoil plans for automakers and create a negative image among carmakers for future Investment in Capital or any FDI

4. Cars be moved to 18 percent slab (Highly unlikely):
Considering that a huge part of revenue that government generates comes from auto sales, this is unlikely to happen. Although this can be considered for 2 wheeler segment considering it is highly elastic on demand with relation to the price.

5. New CESS be introduced to replace Compensation CESS (Likely):
The Government can introduce a new Agriculture CESS on Cars after Compensation CESS expires but the likely rates will be lower than that for Compensation CESS (considering that the revenue will only be shared with Central Government), although it will give an opportunity for Opposition to question Government policy

Other Macros to consider

1. Inflation will raise the prices of products including that of cars
2. Government would want to provide support to EVs to hit their Goal of EV Adaptation by 2030
3. CAFE 3 Norms will be introduced in 2027 making the Carbon emission goals a lot stricter and thus making the process of producing cars more expensive
4. State Governments would want to raise Road Taxes to meet the need for their budgeted revenue

What will happen if Car prices drop due to 35 percent Slab?


Here is a rough calculation

1. Price of Base Hyundai Creta will drop to 10.3 Lakhs (45 to 35)
2. Price of Base XUV 700 will drop to 12.5 lakhs (48 to 35)
3. Price of Base Fortuner will drop to 30.5 Lakhs (50 to 35)
4. Price of Base X5 will drop to 67 lakhs (48 to 35)
5. Price of Base Innova Hycross will drop to 28 Lakhs (43 to 35)

(Note: I have only considered drop in GST Prices to come at nominal amount)

What is the Opinion of other Team BHPians on what is next?

Bold of you to assume that the State Governments would willingly give up the money they mint from the Compensation Cess. Many states are till date, fighting tooth & nail to make it impossible to implement BH series, solely to protect their revenue losses even though the Road tax charged on ex-showroom prices rather than ex-factory prices is completely unjustified.

The entire cess collected is intended for distribution to the States, the Centre gets no part from it. With the current political scenario of freebie-culture driven voting, and State fiscal budgets stretched dry more than ever due to it, there will be huge protests by them against ending the Compensation Cess.

The surplus collection, after paying off Covid debts & interest, even upto 31st March, 2026 is estimated at 70,000 crores. There is no way States will let go of this money, when they scamper about every month to pay thousands of crores in their respective state to our Ladli Behna, Pyaari Bhua & Chulbuli Daadis.

Expect the Cess to continue well into the future, repackaged & presented as a new levy in the name of development. Maybe the Dulaara Bhaiya scheme is around the corner for us men finally.

Yes considering that I believe that introduction of a 35 percent Slab with 17.5 tax for each central and state plus raising state taxes is the most likely scenario

If you were to place the above price drops as a comparator in a table and consider the price of equivalent brand new cars in the present regime, while taking the case of KA as the highest taxed state, the starkness of the differential will be more clearly visible.

According to ET, high-end automobiles are considered under sin goods and are not expected to get any relief from the Cess reduction. But I expect hybrids might get some relief from the government. is currently promoting them on a large scale. What do you think?

Link - https://economictimes.indiatimes.com...2.cms?from=mdr

Yes but sin goods will also need a separate slab. A 28 percent slab will be blessing for automakers and they will take it happily

Off topic: What is the rationale by the government for classifying a high end car as a "sin good"? Sure, it can cause harm if it's involved in a crash, but that is true for every vehicle on the road.

They are categorised due to natural environmental impacts, congestion, and other issues.

Basically it means sin goods and luxury cars. Luxury cars are not taken as sin goods but considered for similar taxes

Government adds. Subtraction is not an option. I have never seen any relief in terms of taxation. See our fuel prices! WE pay to the government almost an equal sum we pay for the fuel we purchase!

I mean income tax was cut to a very generous levels very recently (this financial budget session)

in the end, you would be giving more. GST on Pop Corn!!

The GST on popcorn fiasco cannot be compared to broader policies adopted by the Government. Despite suggestions to hike taxes on luxury shoes and watches they stood their ground and disregarded the suggestion.

If anything they have promised GST reduction in next meeting so I am curious to see how they go about that

Our politicians will never say no to free money. Why should they reduce taxes when people continue to buy cars willingly? If they introduce 2 more taxes and 5 more middle men tomorrow, people will still continue to put themselves in debt to afford it.

Don't expect any actual changes until there is a recession and sales slow significantly for domestic manufacturers. Until then, they will continue to charge whatever they can get away with regardless of how good your argument is.

I guess we are already seeing a slowdown this year. Politicians also depend highly on donation from Big Organizations and so eventually they will pay heed to their demands. With high taxes the scale of FDI gets limited, one big reason Organizations like Toyota and Volkswagen have invested in Maharashtra is looking at future macro scenario. Anyways hoping for the best