This circular provides clarification regarding the availability of input tax credit (ITC) for demo vehicles maintained by authorized motor vehicle dealers. These vehicles are essential for trial runs and feature demonstrations to potential buyers, as per dealership norms. Purchased from manufacturers with tax invoices, these demo vehicles are typically recorded as capital assets in the dealer’s books and may be sold after a specific period.
Input Tax Credit on Demo Vehicles (motor Vehicles With Seating Capacity of ≤ 13 Persons)
Issue: Can authorized dealers claim ITC on demo vehicles used for trial runs, which are classified as motor vehicles for transporting passengers with a seating capacity of no more than 13 persons (including the driver)?
Clarification: Under Section 17(5)(a) of the CGST Act, ITC is blocked for motor vehicles used for transporting passengers unless they are:
- A. Further supplied (sold) as motor vehicles.
- B. Used for transporting passengers.
- C. Used for driving training purposes.
Since demo vehicles are not used for passenger transportation or driver training, they do not qualify under sub-clauses (B) and (C). However, demo vehicles promote the sale of similar vehicles, and therefore, can be considered as used for 'further supply of such motor vehicles' (sub-clause A). As a result, ITC is not blocked for demo vehicles, provided they are used to facilitate further sales.
Itc on Demo Vehicles Used for Purposes Other Than Sales
Issue: What happens if demo vehicles are used for other purposes, such as transporting employees or management?
Clarification: In such cases, ITC would be blocked since the vehicles are not being used for further supply, transportation of passengers, or driver training.
Dealers Acting as Marketing Agents
Issue: If a dealer provides test drive services on behalf of the manufacturer and is not directly involved in sales, can ITC be claimed on demo vehicles?
Clarification: If the dealer merely facilitates test drives and the sale invoice is issued directly by the manufacturer, ITC will be blocked for demo vehicles as they are not used for further supply by the dealer.
Capitalization of Demo Vehicles
Issue: Can dealers claim ITC on demo vehicles that are capitalized in their books of account?
Clarification: Yes, ITC is available for demo vehicles that are capitalized as 'capital goods' under Section 2(19) of the CGST Act, provided they are used in the course of business. However, if depreciation is claimed on the tax component under the Income-tax Act, 1961, ITC on that portion will not be allowed.
If a capitalized demo vehicle is later sold, tax must be paid as per Section 18(6) of the CGST Act.
10x Comments
This circular clarifies that ITC is available for demo vehicles used to promote further sales, even when capitalized, provided they meet the conditions of the CGST Act. Dealers are encouraged to review their usage of demo vehicles to ensure compliance.
For further details, businesses may contact 10X Consulting for expert assistance in navigating GST compliance related to demo vehicles and input tax credits.
