Despite a 17% jump in vehicle sales, dealer margins have shrivelled due to aggressive discounting and non-refundable tax credits, leading the industry to seek relief from the Supreme Court.
Despite a 17% jump in vehicle sales, dealer margins have shrivelled due to aggressive discounting and non-refundable tax credits, leading the industry to seek relief from the Supreme Court.
New Delhi: GST rate cuts boosted sales at two-wheeler and car makers. This, in turn, helped fuel demand for auto companies' stocks, as Nifty Auto raced ahead by 8% over the last three months. However, one group in Motown that is still wrestling with the authorities for back-payments and has seen feeble investor interest is car dealers.
Three of the listed largest car dealers, including Landmark Cars Ltd, Popular Vehicles and Services Ltd, and Competent Automobiles Co. Ltd, saw share prices fall by 20%, 4%, and 1%, respectively, since 3 September, when New Delhi announced goods and services tax (GST) rate cuts.
At the heart of the investor unhappiness is the issue of the compensation cess, which was discontinued by the government.
During discussions with analysts and investors, the management of Landmark and Popular Vehicles acknowledged that they had to take a temporary hit to their profit margins by clearing the stock of vehicles for which they had paid a compensation cess, which was discontinued from 22 September.
The impact on these dealers, along with investors' declining interest, has come into the spotlight after dealers went to the Supreme Court over the compensation cess issue. The Federation of Automobile Dealers Associations' suit led to the issue of a notice to the government last week.
To be sure, the country has thousands of privately held dealerships, whereas the listed space has only a select few dealers. Together, the revenue of these three listed players was ₹11,693 crore, while their market capitalisation was ₹3,109 crore.
The decline in investor interest for dealerships has experts scratching their heads, as the dealers, who are responsible for selling vehicles to consumers, would have typically seen higher sales over the last two months.
Margin erosion
The passenger vehicle market grew 17% to 754,574 units in October-November.
Ashim Sharma, senior partner and group head business at Nomura Research Institute, said that the situation for dealers became difficult in September as people delayed vehicle purchases at a time when they were looking to clear stock.
"There was discounting and efforts by dealers to mitigate the impact of the cess issue, but consumers were delaying their purchases as it was also a period just before the festive season. Who is supposed to reimburse them remains a matter of discussio,n but it is understandable they are asking for relief from the government for the issue," he said.
Before the new GST regime, automobiles attracted a tax of 28% with compensation cess ranging from 1-22% depending on the size of vehicles and engine type, taking the total tax rate to 50% in some cases. Dealers bought vehicles from auto companies by paying both the tax and compensation cess, and while selling the vehicle, they collected both cess and tax, which was paid to the government.
The auto dealers could use the earlier compensation cess, which they paid to auto firms, to settle compensation cess liability to the government. Thus, these dealers did not have to bear the burden of the cess and could pass it entirely to customers. However, the government decided to discontinue the compensation cess from GST from 22 September onwards.
At any time, dealers maintain an inventory of 30-50 days and when the government discontinued the compensation cess, they were left with vehicles for which they had paid the cess but could not collect from customers and settle it.
Estimates from dealers suggest that the entire auto dealer network in the country has ₹2,500 crore compensation cess lying unused.To counter the impact of the removal, auto dealers rushed to introduce offers on vehicles in their stock between 3 and 21 September in an attempt to clear the stock of vehicles for which cess was paid. However, their task was complicated as customers delayed purchases to buy vehicles at lower tax rates.
Legal recourse
Landmark Cars chairman Sanjay Thakkar mentioned during July to September quarter earnings call on 12 November that the removal of compensation cess created a lot of ambiguity for automobile dealers.
"To mitigate this, selective discounting and incentive schemes were introduced by us on new as well as demo cars. While these short-term measures helped maintain customer engagement, they also exerted temporary pressure on the gross margins," Thakkar said during the earnings call.
The company's operating profit margins declined from 5.73% in the September 2024 quarter to 4.48% in the September 2025 quarter, and net profits were ₹0.34 crore and ₹1.51 crore, respectively.
Naveen Philip, managing director at Popular Vehicles, said during an earnings call on 12 November, that dealers hope that they will be able to use the compensation cess even as there was no clarity from the government.
"What the association has done is they filed a writ petition, quite confident that the case would be in the favour of the dealerships because even in the past, even when VAT (Value Added Tax) was there and specific states had cess collected, and when the cess was removed, this amount was credited back by the government through a High Court order," Philip said during the earnings call.
The management informed that it had made a provision of ₹3.6 crore for compensation sales, covering the amount in the tax credit account for compensation cess. Popular Vehicles saw profits fall from ₹7.57 crore in the September 2024 quarter to ₹0.57 crore in the September 2025 quarter. Operating profit margins fell from 3.54% to 2.96% in the same period.
Although Competent Automobiles did not have an earnings call, it also saw an impact on its financial performance. The company's profit during the September 2025 quarter fell by 58% to ₹1.5 crore. Its operating profit margin fell from 2.67% in the September 2024 quarter to 2.02% in the September 2025 quarter.
Requests for comments from all three dealer companies remained unanswered till press time.
Key Takeaways
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