Clarification on Input Tax Credit for Demo Vehicles – Latest Update!

On September 10, 2024, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 231/25/2024-GST. This circular provides clarification on the availability of Input Tax Credit (ITC) for demo vehicles used by motor vehicle dealers. Specifically, it explains how ITC provisions under the CGST Act apply to demo vehicles used for customer trials and demonstrations.

Key Clarifications on Input Tax Credit (ITC)

Demo vehicles, used by dealers to provide test drives, often raise questions about ITC eligibility. Below are the key points outlined in the circular:

1. ITC Eligibility for Vehicles with Seating Capacity of Up to 13 Persons

Section 17(5)(a) of the Central Goods and Services Tax (CGST) Act, 2017, restricts ITC for motor vehicles designed to transport passengers if they have a seating capacity of 13 persons or less. However, there are important exceptions. ITC can be claimed when these vehicles are used for:

• Further supply (sale) of the motor vehicles.
• Passenger transportation.
• Training drivers.

Since demo vehicles are primarily used to promote the sale of similar vehicles, they fall under the “further supply” category. Therefore, dealers can claim ITC on demo vehicles.

2. ITC for Capitalized Demo Vehicles

When demo vehicles are capitalized in the dealer’s books, ITC is still available. The circular clarifies that as long as the vehicles are used for business purposes, they are classified as “capital goods” under Section 2(19) of the CGST Act. Thus, ITC can be claimed on capitalized demo vehicles, provided other conditions are met.

3. Cases Where ITC Is Not Available

There are instances where ITC on demo vehicles is blocked:

• When a demo vehicle is used for non-business purposes, such as transporting employees or management.
• When the dealer acts as an agent and does not directly sell the vehicles.

In such situations, ITC cannot be claimed, as the vehicle is not being used for further supply.

Capitalization and Depreciation of Demo Vehicles

If a dealer capitalizes a demo vehicle, ITC is still claimable unless depreciation has been claimed on the tax component of the vehicle cost under the Income Tax Act, 1961. Furthermore, if a capitalized demo vehicle is sold, the dealer must pay tax according to Section 18(6) of the CGST Act.

Conclusion

This circular provides much-needed clarity for motor vehicle dealers regarding ITC on demo vehicles. Dealers can capitalize demo vehicles without losing out on ITC, as long as they follow the guidelines. This clarification will promote consistency and smooth implementation of GST laws across the country.

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