Input Tax Credit (ITC) on Demo Vehicles refers to the eligibility of a business to claim GST credit on vehicles used for demonstration purposes, primarily by automobile dealers and manufacturers. While ITC on motor vehicles is generally restricted under Section 17(5) of the CGST Act, 2017, an exception applies to demo vehicles used for further supply or resale.
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1. Background
Demo vehicles are those that authorized dealers are required to maintain at their sales outlets in accordance with dealership norms for facilitating the sale of motor vehicles. These vehicles are procured from manufacturers against tax invoices and are typically recorded as capital assets in the dealers’ books of accounts. While they are neither ‘held for sale’ nor ‘put to regular use,’** they serve the purpose of test drives and demonstrating vehicle features to potential buyers. After a specified period, as per dealership norms, these vehicles are generally sold at a written-down value, with applicable taxes payable at the time of sale.
Section 17(5)(a) of the CGST Act restricts input tax credit (ITC) on motor vehicles used for passenger transportation if they have an approved seating capacity of not more than 13 persons (including the driver). A long-standing debate exists on whether ITC on vehicles purchased by car dealers for demonstration purposes falls under this restriction or remains eligible for credit.
2. Clarification by CBIC Through Circular No. 231/25/2024-GST, dated 10-09-2024
As per Section 17(5)(a) of the CGST Act, input tax credit (ITC) on motor vehicles used for the transportation of persons with an approved seating capacity of not more than 13 persons (including the driver) is generally restricted.
However, this restriction does not apply where such motor vehicles are used for :
- Further supply of motor vehicles.
- Transportation of passengers.
- Imparting training on driving such vehicles.
In other words, ITC remains available if the motor vehicles are utilized for these specified taxable supplies.
Pursuant to the recommendations of the 54th GST Council meeting, the CBIC has issued a detailed clarification regarding the determination of input tax credit (ITC) eligibility on demo vehicles supplied to authorized dealers vide Circular No. 231/25/2024-GST, dated 10-09-2024. In this context, the detailed clarifications are outlined in the following paragraphs.
2.1 ITC on Demo Vehicles is Eligible as These are Used for ‘Further Supply of Such Motor Vehicles’
The CBIC has observed that Section 17(5)(a)(A) uses the expression “such motor vehicle” instead of “said motor vehicle,” indicating that the legislative intent was not limited to excluding only the motor vehicle that is itself further supplied from the restriction on input tax credit (ITC) but also to exclude a motor vehicle that is used for the purpose of making a further supply of similar motor vehicles. Since demo vehicles assist potential buyers in deciding to purchase a particular category of motor vehicle, they are considered to be used by the dealer for making “further supply of such motor vehicles” within the meaning of Section 17(5)(a)(A). Accordingly, it has been clarified that ITC in respect of demo vehicles does not stand blocked under Section 17(5)(a) of the CGST Act and shall be available.
2.2 Demo Vehicles are Not Used for Making Taxable Supply of Transportation of Passengers & Imparting Training
The CBIC has observed that authorized dealers utilize demo vehicles for facilitating test drives and providing information regarding vehicle features to potential buyers. It cannot be construed that these demo vehicles are used by authorized dealers for the provision of taxable supplies related to:
- Transportation of passengers, as contemplated under Clause (B) of Section 17(5)(a) of the CGST Act, or
- For imparting training on driving such motor vehicles, as specified under Clause (C) of Section 17(5)(a) of the CGST Act.
Consequently, demo vehicles do not fall within the exclusions provided under sub-clauses (B) and (C) of Clause (a) of Section 17(5) of the CGST Act.
2.3 ITC is Eligible on Demo Vehicles, Whether Capitalized in the Authorized Dealers’ Books or Not
As per Section 16(1) of the CGST Act, a recipient is entitled to avail input tax credit (ITC) on the tax charged on the inward supply of any goods, as defined under Section 2(52) of the CGST Act, including capital goods, as defined under Section 2(19) of the CGST Act, provided such goods are used or intended to be used in the course or furtherance of business.
Further, as per Section 16(3) of the CGST Act, if the authorized dealer has claimed depreciation on the tax component of the demo vehicle, ITC on the said tax component shall not be available. This is one of the conditions for availing input tax credit.
Moreover, as per Section 18(6) of the CGST Act, when a demo vehicle is subsequently sold by the authorized dealer, the dealer shall be liable to pay tax on such supply, and the computation of tax in such cases shall be carried out in accordance with Rule 44(6) of the CGST Rules.
In this context, the CBIC has clarified that the mere capitalization of demo vehicles in the books of accounts of the authorized dealer does not, in itself, impact the availability of ITC, provided that all other conditions stipulated under the Act are duly fulfilled.
2.4 No ITC on Demo Vehicles When Authorized Dealer is Acting as an Agent to Vehicle Manufacturer
There may be instances where an authorized dealer operates as an agent or service provider to the vehicle manufacturer, undertaking marketing activities such as providing test drives to potential customers on behalf of the manufacturer. In such cases, the authorized dealer neither directly purchases nor sells the vehicles, as the sale invoice is issued by the manufacturer directly to the customer.
Consequently, the authorized dealer is merely engaged in rendering marketing and facilitation services to the manufacturer and is not effecting the supply of motor vehicles in his own capacity.
Accordingly, the CBIC has clarified that in such scenarios, the demo vehicle cannot be considered as being used by the dealer for making further supply of such motor vehicles. As a result, ITC on such demo vehicles shall be blocked under Section 17(5)(a)(A) of the CGST Act, thereby rendering it unavailable to the authorized dealer.
