In an important update for vehicle dealers, the CBIC has issued Circular No. 231/25/2024-GST dated September 10, 2024, clarifying the availability of Input Tax Credit (ITC) on demo vehicles. This clarification resolves long-standing confusion about whether ITC can be claimed on vehicles used for demonstration and test drives.
ITC Restrictions Under Section 17(5)(a) of the CGST Act
Section 17(5)(a) of the CGST Act places restrictions on ITC for motor vehicles used for the transportation of persons, specifically those with a seating capacity of 13 persons or less (including the driver). However, ITC is allowed when such vehicles are used for:
- Further supply of motor vehicles (resale or sale of similar vehicles).
- Passenger transportation services.
- Driving schools for imparting driving training.
CBIC Clarification: ITC on Demo Vehicles
The circular addresses a key question for authorized vehicle dealers—whether ITC can be claimed on demo vehicles used for test drives and demonstrations.
- Demo vehicles are typically used by dealers to give potential buyers a firsthand experience of the vehicle before purchase.
- Since demo vehicles promote the sale of similar types of vehicles, the circular clarifies that they fall under the category of further supply of motor vehicles.
Thus, ITC on demo vehicles is allowed as these vehicles are used directly for the sale process of similar vehicles.
Practical Implications for Dealers
- ITC Eligibility: Dealers can claim ITC on demo vehicles used for customer test drives and demonstrations, as they are considered part of the sales process.
- Non-eligible ITC: Vehicles used for other purposes—such as staff transportation or management use—will not be eligible for ITC, as they do not contribute to the further supply of motor vehicles.
Why This Matters
For authorized dealers, this clarification provides much-needed certainty. By defining demo vehicles as part of the further supply of motor vehicles, the CBIC ensures that dealers can rightfully claim ITC on these vehicles. However, it’s important for dealers to ensure that vehicles not used for sales purposes do not have ITC claimed on them, to avoid any non-compliance.
Conclusion
The CBIC Circular No. 231/25/2024-GST offers clarity for vehicle dealers, confirming that demo vehicles are eligible for ITC as they are used to promote the sale of similar vehicles. Dealers should ensure they differentiate between vehicles used for further supply and those used for non-eligible purposes like employee transport. This will help them maximize tax benefits while staying compliant with the GST regulations.
