CBIC received various representations with respect to the admissibility of Input Tax credits on demo vehicles in pursuance of Section 17(5) of the CGST Act. The demo vehicles are maintained by authorized dealers as per dealership norms and are used for providing a trial run and for demonstrating features of the vehicle to potential buyers.
Demo vehicles are purchased by the authorized dealers from the vehicle manufacturers against tax invoices and are generally reflected as capital assets in the books of account of the authorized dealers. After a specified period, the authorized dealer may sell such vehicle at a written down value and applicable tax is payable then.
CBIC has issued clarification vide circular No. 231/25/2024-GST dated 10th September 2024 providing for the admissibility of ITC on demo vehicles. The Circular is discussed below in detail:
1. Questions on which clarification is required?
CBIC has issued clarification on the following matters:
- Availability of ITC on demo vehicles in pursuance of Section 17(5) of the CGST Act
- Availability of ITC on demo vehicles which are capitalized in the books of account by the authorized dealers.
2. Clarification
CBIC has issued the following clarification:
2.1 Admissibility of ITC on Demo Vehicles in pursuance of Section 17(5) of CGST Act
a. Relevant Legal Provisions
- Restriction of availing of ITC concerning motor vehicles is given under section 17(5) of the CGST Act.
- As per Section 17(5)(a) of CGST Act, ITC shall not be available in respect of motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons(including the driver), except when they are used for making following taxable supplies:
- further supply of such motor vehicles;
- transportation of passengers;
- imparting training on driving such motor vehicles.
b. Admissibility of ITC on Demo Vehicles
- CBIC has clarified that the law intends to exclude certain cases from the restriction of ITC based on the nature of outward taxable supplies being made using such motor vehicles.
- The taxable supplies permitted for exclusion from blockage of ITC are:
- Further supply of such motor vehicles,
- transportation of passengers and
- imparting training on driving such motor vehicles.
- Demo vehicles are used by authorized dealers to provide trial runs and to demonstrate features of the vehicle to potential buyers. Therefore, demo vehicles cannot be said to be used by the authorized dealer for providing a taxable supply of transportation of passengers or imparting training on driving such motor vehicles. Therefore, demo vehicles are not covered in the exclusions specified in sub-clauses (B) and (C) of clause (a) of section 17(5) of the CGST Act.
- Accordingly, the question is whether demo vehicles can be said to be used for making “further supply of such motor vehicles”, as given in sub-clause (A) of Section 17(5)(a) of the CGST Act.
- For blockage of ITC, sub-clause (A) of Section 17(5)(a) of the CGST act has used the words “such motor vehicles” instead of “said motor vehicle”. It implies that the intent of the law was not only to exclude from the blockage of ITC, the motor vehicle which is itself further supplied, but also the motor vehicle which is being used for further supply of similar types of motor vehicles.
- Demo vehicles help potential buyers to decide to purchase a particular kind of motor vehicle. Therefore, demo vehicles promote the sale of similar types of motor vehicles and they can be considered to be used for making a ‘further supply of such motor vehicles’.
- Accordingly, the ITC of demo vehicles is not blocked under Section 17(5)(a) of the CGST Act as it is excluded through sub-clause (A) of such clause.
c. Admissibility of ITC to motor vehicle used for other than Demo Purpose
- There may be some cases where specified motor vehicles are used by an authorized dealer for other purposes such as transportation of its staff employees/ management etc.
- In such cases, the same cannot be said to be used for making ‘further supply of such motor vehicles’.
- Therefore, ITC in respect of such motor vehicles shall be restricted under Section 17(5)(a) of the CGST Act
d. ITC where authorised dealers act as a service provider
- There may be cases where the authorized dealer merely acts as an agent or service provider to the vehicle manufacturer for providing marketing services including service of the vehicle test drive on behalf of the manufacturer and is not directly involved in the purchase and sale of the vehicles.
- The sale invoice is directly issued by the manufacturer to the customer.
- For providing a test drive facility, the dealer purchases a demo vehicle from the vehicle manufacturer. The dealer may sell the said demo vehicle after a specified time or kilometers on payment of applicable GST.
- In such a case, the authorized dealer is merely providing marketing services to the vehicle manufacturer and is not making the supply of motor vehicles on his account.
- Therefore, such demo vehicles cannot be said to be used for making further supply of such motor vehicles.
- Accordingly, ITC in respect of such a demo vehicle would not be available to the said dealer.
2.2 ITC where demo vehicles are capitalized in the books of account by the authorized dealers.
- As per provisions of section 16(1) of the CGST Act, every registered taxpayer is entitled to take ITC on any supply of goods and services, where such goods or services are used in the course or furtherance of business subject to specified conditions.
- As per Section 2(52) of CGST Act, “goods” means every kind of movable property other than money and securities but includes actionable claims, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
- Further, as per section 2(19) of the CGST Act, “capital goods” means goods, the value of which is capitalized in the books of account of the person claiming the ITC and which are used or intended to be used in the course or furtherance of business.
- The demo vehicles are used by the authorized dealers to promote the further sale of similar motor vehicles and therefore, demo vehicles are used in the course or furtherance of the business of the authorized dealers.
- Where such vehicles are capitalized in the books of accounts by the authorized dealer, the said vehicle falls in the definition of “capital goods”.
- As per provisions of section 16(1) of the CGST Act, a recipient of goods is entitled to take ITC in respect of tax charged on the inward supply of any goods, which as per the definition of “goods” under section 2(52) of CGST Act, includes even capital goods.
- Further, as per section 2(19), the availability of ITC on demo vehicles is not affected by way of capitalization of such vehicles in the books of account of the authorized dealers, subject to the fact that such vehicles are used for the purpose or furtherance of business
- However, in the case of capitalization, the availability of ITC would be subject to provisions of section 16(3) of the CGST Act, which provides that where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the Income-tax Act, 1961, the ITC on the said tax component shall not be allowed.
- Further, in case of subsequent sale of capitalized demo vehicle, the authorized dealer shall have to pay an amount or tax as per provisions of section 18(6) of CGST Act read with rule 44(6) of the Central Goods and Service Tax Rules, 2017.
3. Conclusion:
Admissibility of ITC on demo cars has always been a matter of litigation and there have been many precedents issued on such matters taking different stands. This circular will bring uniformity and clarity on such matters and will reduce the litigations.
