Clarification on availability of input tax credit in respect of demo vehicles.

Circular No.: 231/25/2024-GST
Date of Circular: 10th September 2024
Relevant Sections and Rules:

• Section 17(5)(a), CGST Act, 2017 – Blocked ITC on certain motor vehicles
• Section 16(1), 16(3), 18(6), CGST Act, 2017 – Eligibility and conditions for ITC
• Section 2(19) & 2(52), CGST Act – Definitions of capital goods and goods
• Rule 44(6), CGST Rules, 2017 – Tax on supply of capital goods

Clarification on Availability of Input Tax Credit (ITC) on Demo Vehicles

1. ITC Eligibility for Demo Vehicles Used in Sale of Similar Motor Vehicles (Sec. 17(5)(a)):

• Demo vehicles used by authorized motor vehicle dealers for trial runs and demonstrations are not blocked from ITC under Section 17(5)(a) CGST Act.
• Though such vehicles have seating capacity ≤13 persons, they qualify for ITC since:
  • They are used to promote sale of similar motor vehicles, and
  • This qualifies as usage for further supply of such motor vehicles under Section 17(5)(a)(A).

✅ ITC allowed where demo vehicles promote sales of similar vehicles.

2. ITC Not Allowed in Specific Non-Supply Cases:

• ITC not available where demo vehicles are:
  • Used for employee transport or managerial purposes,
  • Purchased by dealers acting as agents or facilitators (not resellers), where OEM issues invoice directly to customer.
    In these cases, dealer is not making “further supply of such motor vehicles”.

🚫 ITC disallowed when demo vehicles aren’t used for eligible taxable outward supply.

3. Capitalization of Demo Vehicles Does Not Impact ITC Eligibility (Sec. 16 & 2(19)):

• Demo vehicles capitalized in dealer’s books are still eligible for ITC, if used in furtherance of business.
• As per Section 2(19), capital goods include such demo vehicles used in business.
• However, no ITC allowed on tax component if depreciation is claimed on it under Income Tax Act (Sec. 16(3)).

✅ Capitalization ≠ ITC blockage, but ensure no depreciation claimed on GST portion.

4. Sale of Capitalized Demo Vehicle – GST Implication (Sec. 18(6), Rule 44(6)):

• When a demo vehicle is eventually sold, dealer must pay tax on the transaction as per Section 18(6) read with Rule 44(6).

Source: Circular No.: 231/25/2024-GST