Stuck Compensation Cess Credit After GST 2.0: Can It Be Used, Refunded or Transferred?
By GST Reco Pro
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Compensation cess was removed on most goods from 22 September 2025, but many businesses, car dealers above all, still hold cess credit they cannot use. Here is the legal position, what is on the table, and what to do with the balance before the FY 2025-26 annual return.
When the 56th GST Council folded compensation cess into the new rate structure, the levy on most goods went to nil from 22 September 2025. Tobacco and related products were the exception. For businesses that had paid cess on stock bought before that date, especially automobile dealers, the change left a problem behind: a balance of cess credit in the electronic credit ledger, and almost no cess liability left to set it against.
The legal position
Cess credit is ring-fenced by statute. The proviso to Section 11 of the GST (Compensation to States) Act allows ITC of compensation cess to be used only to pay compensation cess. It cannot be used against CGST, SGST or IGST, and state guidance has said the same. Once a business has no further cess liability, the credit has nothing to be used against.
- Cross-utilisation against CGST, SGST or IGST: not permitted under the current law.
- Transfer to another ledger or GSTIN: no mechanism notified for cess balances.
- Refund: no general refund route for an accumulated balance created by the rate change.
A senior CBIC official is reported to have said the same publicly: under the current law the credit can only be used to pay compensation cess. Commentators note that without a specific notification or saving provision, the balances are at risk of lapsing.
What is being asked for
Dealer associations have asked the government to allow the balance to move to the IGST or CGST ledger. Legal commentary has explored possible routes to utilisation, transfer or refund. Reports ahead of the 57th GST Council meeting in October 2026 included a possible time-bound window for migrating eligible balances into the GST credit ledger. Until a recommendation is notified by CBIC, none of these is law.
What to do with the balance now
- Quantify it. Record the cess credit balance as at 22 September 2025 and as at 31 March 2026, and how much was used in between on goods still attracting cess.
- Document where it came from. Keep the purchase invoices and GSTR-2B entries that created the credit. Any future migration scheme is likely to require evidence that the balance is eligible.
- Report it accurately in GSTR-9 for FY 2025-26. The cess columns of the annual return should reflect the actual credit availed, used and remaining.
- Agree the accounting treatment with the auditors. Whether to keep the balance as an asset, provide against it or write it off is an accounting judgment, and it should be documented.
- Watch the 57th Council outcome and the notifications that follow, and be ready to file quickly if a time-limited window opens.
Tracing how a cess balance built up means reading a year of GSTR-3B returns side by side. GST Reco Pro converts GSTR-1 and GSTR-3B PDFs, including the cess columns, into one Excel workbook in your browser.
Convert GSTR returns to Excel →Related reading: how the 22 September 2025 rate change affects the FY 2025-26 annual return.
Read the GSTR-9 rate change guide →Frequently Asked Questions
Can compensation cess credit be used to pay GST?
No. Under the proviso to Section 11 of the GST (Compensation to States) Act, compensation cess credit can be used only to pay compensation cess. It cannot be used against CGST, SGST or IGST.
Can I get a refund of accumulated compensation cess credit?
As of now there is no notified mechanism to refund or transfer cess credit left over after the levy was removed on most goods from 22 September 2025. Industry has asked for a transfer to the GST ledger, and reports suggest the GST Council may consider it, but nothing applies until CBIC notifies it.
Will my compensation cess credit lapse?
Commentators note that without a specific notification or saving provision the balance cannot be used and is at risk of lapsing. Keep it documented and reported accurately, and watch for any notification following the GST Council's recommendations.
From when was compensation cess removed?
From 22 September 2025 on most goods, following the 56th GST Council's recommendations, with tobacco and related products as the main exception.