The Central Board of Indirect Taxes and Customs (CBIC) recently issued Circular No. 231/25/2024-GST, dated 10th September 2024, which addresses key issues related to the availability of Input Tax Credit (ITC) on demo vehicles used by authorized motor vehicle dealers. This clarification brings uniformity in the interpretation of GST laws across field formations, offering relief to dealers managing demo vehicles.
What Are Demo Vehicles?
Demo vehicles are motor vehicles maintained by authorized dealers to provide trial runs and demonstrate features to potential buyers. These vehicles are purchased from manufacturers and are typically classified as capital assets in the dealers’ books.
ITC on Demo Vehicles – Clarified!
The circular provides clarity on the availability of ITC in respect of demo vehicles by addressing two crucial points:
- Demo Vehicles as Capital Assets: Demo vehicles are capitalized in the dealers’ accounts as they are used to promote the sale of motor vehicles. The circular affirms that ITC is available on such vehicles, as they are considered to be used in the furtherance of business and fall within the scope of “capital goods” under Section 2(19) of the CGST Act.
- Input Tax Credit Eligibility (Section 17(5)(a)): According to the CGST Act, ITC is restricted on motor vehicles with an approved seating capacity of not more than 13 persons unless they are used for specific purposes like:
- Further supply of the same motor vehicles,
- Transportation of passengers, or
- Driving training services.
Since demo vehicles are used for further supply of motor vehicles, they are eligible for ITC. This interpretation ensures that the ITC blockage does not apply to demo vehicles under Section 17(5)(a) if they are used for promoting sales.
Key Scenarios Clarified
- Capitalization of Demo Vehicles: ITC is available on demo vehicles even when they are capitalized in the dealer’s accounts, as they qualify as capital goods used in the furtherance of business. However, ITC will not be available if the dealer has claimed depreciation on the tax component of the capital goods under the Income Tax Act.
- Non-Eligible Use Cases: ITC will be blocked if demo vehicles are used for purposes such as transportation of staff or if the dealer acts merely as a marketing service provider for the manufacturer without direct involvement in the purchase and sale of vehicles.
- Sale of Demo Vehicles: When demo vehicles are sold after being used for a certain period, the dealer must pay GST on the written down value as per Section 18(6) of the CGST Act.
What Does This Mean for Dealers?
This clarification from CBIC offers significant advantages to motor vehicle dealers. ITC can be availed on demo vehicles used for promotional purposes, reducing the overall GST cost burden. However, dealers must ensure proper accounting and avoid claiming depreciation on the tax component to retain ITC benefits.
This update ensures that demo vehicles used for sales promotion are correctly aligned with the GST framework, enabling businesses to recover taxes paid on vehicle purchases, provided the legal requirements are adhered to.
Practical Example:
Scenario: ABC Motors is an authorized dealer for XYZ Cars. To attract customers, ABC purchases demo cars from XYZ Cars for test drives and demonstrations. The demo cars cost ₹10,00,000 with 18% GST, making the total purchase ₹11,80,000. After 2 years, ABC plans to sell the demo car at ₹5,00,000 (excluding GST).
Solution:
- ITC Eligibility: Since the demo car is used for the further supply of similar vehicles (sales promotion), ABC Motors can claim ITC of ₹1,80,000 on the initial purchase, per Section 17(5)(a).
- Sale of Demo Vehicle: After two years, ABC sells the demo car at ₹5,00,000. As the demo vehicle is capitalized, ABC must pay GST on the written down value according to Section 18(6). Assuming the car depreciated to ₹5,00,000, ABC will charge 18% GST on this amount, i.e., ₹90,000.
Thus, ABC Motors benefits from the ITC at the time of purchase and fulfils its GST obligations on sale, optimizing their tax strategy.
For more information, you can read the official CBIC Circular here.
