Circular No 262/08/2026 : GST ITC Clarification on Demo Vehicles Purchased by Authorised Dealers
The Central Board of Indirect Taxes and Customs (CBIC) has issued an important clarification regarding the eligibility of ITC on demo vehicles purchased by authorised dealers or agents of motor vehicle manufacturers.The Circular provides relief to authorised dealers operating under the Dealer-Agency Model, who were earlier denied ITC on demo vehicles under Circular No. 231/25/2024-GST dated 10.09.2024.
1. Background – Earlier Clarification on ITC for Demo Vehicles :
Under Paragraph 4.6 of Circular No. 231/25/2024-GST dated 10.09.2024, CBIC had clarified that:
- Where an authorised dealer acts merely as an agent or service provider of the vehicle manufacturer, ITC on demo vehicles purchased for providing test-drive facilities would not be available.
- This is because the authorised dealer provides only marketing or facilitation services to the manufacturer.
- The actual supply of motor vehicles is made by the manufacturer directly to the customer, rather than by the authorised dealer.
- Accordingly, such demo vehicles were not considered to be used by the dealer for further supply of motor vehicles.
- Therefore, ITC was treated as blocked under Section 17(5)(a)(A) of the CGST Act, 2017.
Earlier position: ITC on demo vehicles was not available to authorised dealers operating under the Dealer-Agency Model.
2. Legal Provision – Section 17(5)(a) of the CGST Act, 2017
Section 17(5)(a) restricts ITC on motor vehicles used for transportation of persons having an approved seating capacity of not more than 13 persons, including the driver.However, ITC is permitted where such motor vehicles are used for making the following taxable supplies:
- Further supply of such motor vehicles.
- Transportation of passengers.
- Imparting training on driving such motor vehicles.
These restrictions apply notwithstanding Sections 16(1) and 18(1) of the CGST Act.
3. Understanding the Two Business Models Followed by Vehicle Dealers
CBIC has explained that vehicle sales are primarily carried out through two different business models.
| Particulars | Traditional Dealership Model | Dealer-Agency Model |
| Purchase of vehicles | Dealer purchases a fleet of new vehicles from the manufacturer | Dealer purchases new vehicles from the manufacturer as required for demo or test-drive purposes |
| Sale to customers | Dealer directly sells vehicles to customers on its own account | Manufacturer (OEM) directly sells vehicles to customers |
| Role of dealer | Dealer sells vehicles and provides test-drive facilities | Dealer provides demonstration and test-drive facilities |
| Demo vehicles | A few vehicles from the purchased fleet are designated for demonstration | Vehicles are purchased specifically for demo and test-drive purposes |
| Purpose of demo vehicles | Promote sales by providing test drives | Promote sales by providing test drives |
4. Similar Treatment of Demo Vehicles Under Both Business Models
CBIC has observed that demo vehicles are treated similarly under both business models.The following points have been highlighted:
- Purchase against tax invoices: Authorised dealers purchase demo vehicles from vehicle manufacturers against tax invoices.
- Capitalisation in books: Demo vehicles are generally recorded as capital assets in the books of account of authorised dealers.
- Mandatory holding period: Dealers are required to retain such vehicles as demo vehicles for a specified mandatory period.
- Subsequent sale: After the mandatory period, demo vehicles are generally sold by the dealer at their written-down value.
- GST on subsequent sale: Applicable GST is payable when such demo vehicles are subsequently sold.
- Motor Vehicle Rules: Demo vehicles are treated similarly under the Central Motor Vehicles Rules, 1989.
Since demo vehicles have the same purpose and treatment under both models, CBIC has recognised that denying ITC under the Dealer-Agency Model would result in discriminatory treatment.
5.Interpretation of Section 17(5)(a)(A) – Meaning of “Such Motor Vehicles”
CBIC has clarified the significance of the expression “such motor vehicles” used in Section 17(5)(a)(A) of the CGST Act.
- The law uses the expression “such motor vehicles” instead of “said motor vehicle”.
- This indicates that ITC is not restricted only to the particular vehicle that is subsequently sold.
- ITC is also permitted on vehicles used for promoting the further supply of similar motor vehicles.
- Since demo vehicles under both business models help promote the sale of similar vehicles, ITC should be allowed under both models.
Demo vehicles used to promote the further supply of similar motor vehicles qualify for ITC under Section 17(5)(a)(A), even where the manufacturer directly sells the vehicles to customers.
6. Major Clarification – ITC Now Allowed Under the Dealer-Agency Model
After examining the issue, CBIC has clarified that:
