Introduction
The Central Board of Indirect Taxes and Customs (‘CBIC’) issued a circular dated 10.09.2024 clarifying the availability of Input Tax Credit (‘ITC’) for demo vehicles[i]. This clarification aims to ensure a consistent interpretation of the law regarding ITC on demo vehicles, offering clarity to dealers using these vehicles to promote sales.
Demo vehicles showcase features and allow customers to test drive them, making them critical sales tools for vehicle dealers. Typically, dealers purchase demo vehicles from manufacturers, capitalize them in their books of accounts, and eventually sell them at a depreciated value.
S. 17(5) of the Central Goods and Services Act, 2017 (‘CGST’) restricts ITC on motor vehicles used for transporting persons with a seating capacity of less than 13 persons unless the vehicles are used for:
Further supply of such motor vehicles,
Transportation of passengers, or
Imparting driving training for such motor vehicles.
The key point of discussion was whether demo vehicles used by dealers for test drives and demonstrations qualify under the ‘further supply’ exception in the CGST Act.
Clarification on ITC Availability for Demo Vehicles
The CBIC Circular clarifies that demo vehicles used by authorised dealers directly promote the sale of similar motor vehicles, thereby qualifying as ‘further supply of motor vehicles’ under s. 17(5)(a)(A) of the CGST Act.
The CBIC noted that the use of the term ‘such motor vehicles’ in s. 17(5)(a)(A) of the CGST, rather than ‘said motor vehicle,’ indicates that the intention was not only to exclude vehicles meant for direct resale from the blockage of ITC but also those used to promote the sale of similar vehicles.
It has also been clarified that demo vehicles capitalised in the dealer’s books of accounts are eligible for ITC, provided no depreciation has been claimed on the tax component under the Income-tax Act, 1961. Additionally, when the capitalised demo vehicle is subsequently sold, the dealer must comply with GST provisions, specifically s. 18(6) of the CGST Act read with r. 44(6) of the CGST Rules.
The CBIC further clarified that if an authorised dealer merely acts as an agent or service provider to the vehicle manufacturer, providing marketing services, including test drives on behalf of the manufacturer, without direct purchase or sale, such vehicles do not qualify as ‘further supply.’ Thus, ITC would not be allowed on these demo vehicles as they are not used for direct sales by the dealer.
Our Analysis
The CBIC’s clarification provides substantial relief to authorised motor vehicle dealers by confirming that ITC is available on demo vehicles used for promotional purposes. However, dealers must ensure careful accounting practices when capitalising these demo vehicles, as depreciation on the tax component is not permissible if ITC is claimed, in accordance with s.16(3) of the CGST Act.
This clarification confirms that dealers can avail ITC on demo vehicles as they qualify as ‘further supply of motor vehicles’ under s. 17(5)(a)(A) of the CGST Act. However, dealers acting purely as agents or service providers to manufacturers, without directly selling these vehicles, will not be eligible for ITC. This circular resolves long-standing ambiguities regarding ITC on display or demonstration vehicles, thereby aiding dealers in managing their GST liabilities more effectively.
End Note
[i] Circular No. 231/25/2024-GST
Authored by Maarij Ahmad, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.