Summary of the Clarification on availability of input tax credit on demo vehicles
Circular No 231/25/224-GST has Clarification on availability of input tax credit on demo vehicles. The dealers generally purchase the demo car from manufacturer for the purpose to give buyers test drives and to show them the features of the car. After paying tax on it, the dealer list the demo car as capital assets in their accounts. These demo vehicles must be kept for a minimum time before they can be sold. when they are sold after this period they are usually sold at reduced price and the dealer needs to pay the required tax on it.
Two issues that has been covered under this circular:
- Availability of input tax credit on demo vehicles, which are motor vehicles for transportation of passengers having approved seating capacity of not more than 13 persons (including the driver), in terms of clause(a) of section 17(5) of Central Goods & Services Tax Act, 2017 (hereinafter referred to as the ‘CGST Act”).
- Availability of input tax credit on demo vehicles in cases where such vehicles are capitalized in the books of account by the authorized dealers.
Issue No 1: Availability of input tax credit on demo vehicles, which are motor vehicles for transportation of passengers having approved seating capacity of not more than 13 persons (including the driver), in terms of clause(a) of section 17(5) of Central Goods & Services Tax Act, 2017 (hereinafter referred to as the ‘CGST Act”).
Clarification: Section 17(5)(a) of CGST Act,2017 provides that ITC shall not available in respect of motor vehicles having seating capacity less than 13 (including driver) except when they used for :
- Further supply of such motor vehicles or
- Transportation of passengers
- Imparting Training on driving such motor vehicles
As demo vehicles are used by authorized dealers to provide trial run and to demonstrate features of the vehicles to potential buyers , it helps the potential buyers to make a decision to purchase a particular kind of motor vehicle.Therefore, as demo vehicles promote sale of similar type of motor vehicles, they can be considered to be used by the dealer for making ‘further supply of such motor vehicles’. Accordingly, input tax credit in respect of demo vehicles is not blocked under clause (a) of section 17(5) of CGST Act, as it is excluded from such blockage in terms of sub-clause (A) of the said clause.
Motor vehicles used by authorized dealer for the purpose of transportation of its staff employees/management etc. for transportation of passenger having seating capacity not more than 13, Input Tax Credit in respect of such motor vehicles will be blocked u/s 17(5) (a)(A) of CGST Act,2017.
In case of authorized dealer merely act as agent or service provider to vehicle manufacturer for providing marketing service including providing facility of vehicle test drive to the potential customers of vehicle on the behalf of the manufacturer and is not directly involved in purchase and sale of the vehicles. In such case invoice is directly issued by manufacturer to customer.
The authorized dealer may sell the demo vehicle after specified time or Kilometers as per agreement with manufacturer on payment of GST. The Demo vehicle can not be said to be used by the dealer for making further supply of such motor vehicles. Hence ITC on such demo vehicle would not be available to the said dealer as it is blocked u/s 17(5)(a)(A)of CGST Act,2017.
Issue No 2 : Availability of input tax credit on demo vehicles in cases where such vehicles are Capitalized in the books of account by the authorized dealers
Clarification:
As per provisions of section 16(1) of CGST Act, every registered taxpayer is entitled to take input tax credit charged on any supply of goods and services made to him, where such goods or services are used in the course or furtherance of business of such person, subject to such conditions and restrictions as may be prescribed and in the manner which is specified.
Where the demo vehicle is capitalised in the books of accounts by authorized dealer the said vehicle fall under section 2(19) of CGST Act as Capital goods. As per provision of section 16(1) of CGST Act, subject to such conditions and restrictions as may be prescribed, a recipient of goods is entitled to take input tax credit in respect of tax charged on the inward supply of any goods, which as per definition of “goods” under section 2(52) of CGST Act, includes even capital goods.
Further, section 2(19) of CGST Act also recognizes that capital goods are used or intended to be used in the course or furtherance of business.
Accordingly, availability of input tax credit on demo vehicles is not affected by way of capitalization of such vehicles in the books of account of the authorized dealers, subject to other provisions of the Act.
However, it is to be mentioned that in case of capitalization of demo vehicles, availability of input tax credit would be subject to provisions of section 16(3) of 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 input tax credit on the said tax component shall not be allowed.
It is further mentioned that in case demo vehicle, which is capitalized, is subsequently sold by the authorized dealer, 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.
Download –Circular No 231/25/2024
