CBIC allowed Automobile Dealers to claim ITC on Demo Cars used for Sales Promotion

The Central Board of Indirect Taxes and Customs (CBIC) has stated that automobile dealers who use demonstration vehicles or demo cars to promote sales can claim an input tax credit (ITC) under the GST rules. However, no ITC would be provided if dealers used demo cars for their personal purposes while conducting business.

According to a circular issued by the Central Board of Indirect Taxes and Customs (CBIC), authorised dealers must keep demo vehicles at their sales outlets in accordance with dealership standards, which are used for offering trial runs and displaying vehicle features to potential customers.

These vehicles are purchased by authorised dealers from vehicle manufacturers using tax invoices and are often recorded as capital assets in the authorized dealers’ books of account.

Based on the dealership norms, these vehicles may be required to be held as demo vehicles by approved dealers for a particular period of time before being sold by the dealer at a written down value, with appropriate tax payable at that time.

“Demo vehicles are used by authorized dealers to promote the sale of similar motor vehicles, and so such vehicles appear to be employed in the course or promotion of the authorized dealers’ business. Where such vehicles are capitalized in the books of accounts by the authorized dealer, the vehicle meets the criteria of ‘capital goods’,” the CBIC stated.

The GST law acknowledges that capital goods are used or intended to be utilized in the course or furtherance of business, therefore ITC can be claimed on them subject to other provisions of the law, it added.

However, there may be some cases where an authorized dealer uses motor vehicles for people’s transportation for reasons other than the further supply of such motor vehicles, such as for the transportation of its employees/management. In such situations, the same cannot be deemed to be used for ‘further supply of such motor vehicles’, and hence ITC in respect of such motor vehicles is not accessible.

The CBIC circular also stated that if 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 of 1961, the ITC on that tax component will not be awarded.

Car sales are subject to a 28% GST plus any applicable cess.

Furthermore, the circular carefully examines a variety of scenarios, including those in which demo vehicles are used exclusively as marketing tools or by service providers with no direct involvement in sales.

In such scenarios, the circular rightly disallows ITC, indicating the government’s desire to limit ITC to situations where there is a direct link to taxable supplies. This approach improves compliance while also facilitating legitimate business operations.

For Official Circular Download PDF Given Below: