CBIC Allows ITC on Demo Vehicles to Authorised Dealers Under Dealer-Agency Model under Section 17(5):

The Central Board of Indirect Taxes and Customs (CBIC) under the Ministry of Finance (Department of Revenue), in exercise of its powers granted under Section 168 (1) of the Central Goods and Services Tax (CGST) Act, 2017, has issued a clarification vide a Circular No. 262/08/2026-GST, dated October 26, 2026, regarding Input Tax Credit (ITC) admissibility to authorised agents appointed by manufacturers for the sale of motor vehicles, pursuant to the Circular No. 231/25/2024-GST dated September 10, 2024.

In the circular, the CBIC drew attention to Circular No. 231/25/2024-GST, wherein the concerned tax authorities clarified certain issues concerning the availability of input tax credit (ITC) in respect of demo vehicles.

The CBIC flagged that the present clarification has been issued following the receipt of several representations issued by trade and industry regarding the admissibility of input tax credit (ITC) on demo vehicles to authorised agents appointed by vehicle manufacturers for the sale of motor vehicles in respect of Circular No. 231/25/2024-GST dated September 10, 2024.

The tax authorities in paragraph 4.6 of the said circular had clarified that when an authorised dealer only plays the role of an agent or service provider to the vehicle manufacturer, the ITC (Input Tax Credit) will be blocked as per subclause (A) of clause (a) of Section 17(5) of the CGST Act, 2017, in relation to a demo vehicle purchased by such authorised dealer for providing the facility of vehicle test drive.

According to the para, the reason behind this is that in such a situation, the supply of motor vehicles is not made on the account of the authorised dealer; only marketing or facilitation services to the vehicle manufacturer are provided.

However, as per the present Circular No. 262/08/2026-GST, dated October 26, 2026, the CBIC has officially withdrawn the aforementioned paragraph 4.6 of the Circular No. 231/25/2024-GST dated September 10, 2024. According to the current circular, it has been clarified that "the input tax credit on the demo vehicles is not blocked under clause (a) of section 17(5) of the CGST Act, to the dealer in the dealer-agency model."

For complete clarification, refer to the official circular.