Finance Ministry approves Deductions of GST on Demo Vehicles to Dealers

The Union Finance Ministry released a series of circulars on Wednesday providing relief to the car industry, advertising companies that serve overseas clients, data hosting service providers, and goods exporters.

“Demo vehicles are used by authorized dealers to conduct trial runs and to demonstrate the characteristics of the vehicle to potential buyers, which helps them make a decision to buy a specific type of motor vehicle. As a result, because demo vehicles stimulate the sale of comparable types of motor vehicles, they may be utilized by the dealer to make additional supplies of such motor vehicles,” according to a circular released by the Central Board of Indirect Taxes and Customs (CBIC).

The circular also stated that even if vehicles are capitalised in the book of account, the availability of deductions of Goods and Services Tax (GST) should not be affected.

According to tax experts, “The circular has correctly analysed the concept of ‘goods being used for making taxable supplies’ and stated that as demo vehicles are used for test drives, display of features, they enhance the sales and hence are eligible for credit.”

Another circular was issued on the supply of data hosting services, which are offered by Indian enterprises to cloud computing service providers situated outside of India. Such services were not classified as exports by tax authorities, resulting in GST liabilities.

Various clarifications have been given on this subject, saying that such services, subject to specific restrictions, qualify as exports and hence do not incur GST liability.

“Supply of data hosting services being provided by a data hosting service provider located in India to an overseas cloud computing entity can be regarded as export of services, subject to the fulfillment of the other conditions mentioned in section 2(6) of IGST Act,” the circular said following a review of various factors.

Another circular on offering assistance to exporters specified that if inputs were imported using any customs benefit, but taxes were later paid on them, the output GST paid on the export of such goods would be refunded.

“Refund of IGST claims on exports made with payment of integrated tax in such cases may not be considered to be in breach of provisions of sub-rule (10) of rule 96 of CGST Rules,” according to the CBIC circular.

Clarification was also offered on the advertising services provided to overseas clients. The circular examines various criteria to determine if advertising firms qualify as “intermediaries,” international clients qualify as beneficiaries, and such services are performance-based. The consideration of such issues in the Circular is likely to result in services qualifying as exports and so exempt from GST.