ITC on demo vehicles-GST Circular dated 10.09.2024!

"Demo vehicles" play a crucial role in the automotive industry, allowing potential customers to experience the look, feel, and performance of a vehicle before making a purchase decision. However, the treatment of Input Tax Credit (ITC) on such demo vehicles has often been a topic of discussion and confusion among businesses. To address this, the GST Council issued a significant circular on 10th September 2024, providing much-needed clarity on the ITC implications for demo vehicles used by automobile dealers. In this blog, we will break down the key highlights of this circular, helping you understand how it impacts the eligibility and claiming of ITC on demo vehicles, and what it means for your business under the GST framework.

Key highlights: Circular No. 231/25/2024-GST dated 10.09.2024

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This circular covers clarification on the availability of Input Tax Credit (ITC) on demo vehicles in the following 2 cases:

1. Demo vehicles meant for passenger transport having seating capacity of up to 13 persons
2. Demo vehicles that are capitalized in the books of accounts.

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ITC on Demo vehicles meant for passenger transport having a seating capacity up to 13 persons:

1. Section 17(5)(a) of the CGST Act, 2017 states that input tax credit shall not be available in respect of motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including the driver), except when they are used for making following taxable supplies, namely:

• Further supply of such motor vehicles; or
• Transportation of passengers; or
• Imparting training on driving such motor vehicles.

2. As demo vehicles are used by authorized dealers to provide trial runs and to demonstrate features of the vehicle to potential buyers, they cannot be used by the authorized dealer for providing a taxable supply of transportation of passengers or imparting training on driving such motor vehicles.

3. However, the usage of the words "such motor vehicles" instead of "said motor vehicle", in sub-clause (A) of clause (a) of section 17(5) of the CGST Act, implies that the intention of the lawmakers was not only to exclude from the blockage of input tax credit, the motor vehicle which is itself further supplied, but also to exclude from the blockage of input tax credit, the motor vehicle which is being used for the purpose of further supply of similar type of motor vehicles.

4. Therefore, it is clarified that ITC on such demo vehicles is available to authorized dealers.

5. It is to be noted that ITC is not available for motor vehicles up to 13 seaters used by authorized dealers for any other use, say for transportation of its staff employees/ management, etc.

6. Also, ITC is not available in the cases where authorized dealer merely acts as an agent or service provider to the vehicle manufacturer for providing marketing service, including providing the facility of vehicle test drive to the potential customers of the vehicle on behalf of the manufacturer and is not directly involved in purchase and sale of the vehicles.

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Availability of ITC on demo vehicles in cases where such vehicles are capitalized in the books of account by the authorized dealers:

1. As per section 2(19) of the CGST Act, 2017, "capital goods" means goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
2. Where demo vehicles are capitalized in the books of accounts by the authorized dealer, the said vehicle falls in the definition of "capital goods" under section 2(19) of the CGST Act.
3. 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 the CGST Act also recognizes that capital goods are used or intended to be used in the course or furtherance of business.
4. Therefore, it is clarified that ITC is available even if the demo vehicles are capitalized in the books of accounts by the authorized dealer.
5. However, 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.

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To read the full circular here.

Conclusion

The GST Circular No. 231/25/2024-GST dated 10th September 2024 provides much-needed clarity on the availability of Input Tax Credit (ITC) on demo vehicles used by automobile dealers. By addressing specific cases such as passenger transport vehicles with seating capacities up to 13 persons and demo vehicles that are capitalized in the books of accounts, the circular helps eliminate ambiguity and ensures that businesses can now make informed decisions regarding ITC claims. It emphasizes the circumstances under which ITC is available, ensuring compliance with the GST framework while optimizing tax benefits. Automobile dealers should carefully assess their demo vehicle usage to maximize their tax positions in line with these guidelines.

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