NEW DELHI: Retroactive clarification issued by GST Council on compensation tax causes major unrest in Indian auto sector as companies now face show cause notices demanding payment for past vehicle sales .

According to sources, automakers have received tax notices worth Rs 10,000 crore for non-payment of compensation tax, which is part of the Goods and Services Tax (GST), on utility vehicles sold before a clarification is issued in 2022. This issue affects several of the popular models in the segment, including Mahindra’s Thar and Scorpio, Tata Motors’ Safari and Harrier, and Maruti’s Brezza, among others .

In 2022, the Council had issued a clarification regarding the application of the tax on all commercial vehicles and SUVs with certain criteria for the earlier period. Companies are now receiving show cause notices. “The most damaging aspect of this retroactive application is that businesses cannot pass the tax burden on to their customers. The vehicles have already been sold and automakers cannot go back and charge the tax from previous buyers,” said Abhishek Rastogi, founder of Rastogi Chambers.

Sudipta Bhattacharjee, partner at Khaitan & Co, said: “Unfortunately, the ghost of retrospective taxation seems to have resurfaced again. The problem lies with an explanation of “ground clearance” that was added after the 50th GST Council meeting – since it was added as an “explanation”, the GST authorities seem to have taken a stand that the same would be applicable retrospectively.

“However, this position loses sight of the fact that the addition of the said explanation was recommended in conjunction with the GST Council’s recommendation to amend the relevant rate entry in the GST Compensation Tax Notification to include all commercial vehicles in this entry – in other words, it was not an independent explanation but one made necessary by the amendment and which therefore cannot be read independently, with retrospective effect. It is hoped that the CBIC will issue appropriate clarifications to avoid retrospective liabilities on automakers based on such a hyper-technical (and seemingly untenable) argument,” Bhattacharjee added.