The Central Board of Indirect Taxes and Customs ( CBIC ) has issued a detailed clarification regarding the availability of input tax credit ( ITC ) on demo vehicles used by authorised motor vehicle dealers.
These demo vehicles are maintained by dealerships for providing trial runs and showcasing vehicle features to potential buyers as per dealership norms. Purchased directly from manufacturers against tax invoices, demo vehicles are typically classified as capital assets in the dealer’s books of accounts.
The CBIC clarification addresses two main issues:
Availability of ITC on demo vehicles, which are motor vehicles for transportation of passengers having approved seating capacity of not more than 13 persons (including the driver), in terms of clause(a) of section 17(5) of CGST Act.
Clause (a) of Section 17(5) of the CGST Act disallowed input tax credit (ITC) on motor vehicles used for transporting persons with a seating capacity of 13 or fewer, except when used for specific purposes: further supply of such vehicles, transportation of passengers, or driving training.
Demo vehicles, used by dealers for test drives and to showcase vehicle features, do not qualify under the exceptions for passenger transport or driving training. However, since demo vehicles are used to promote and facilitate the sale of similar vehicles, they qualify for the exception related to further supply, allowing ITC for these vehicles. If demo vehicles are used for other purposes, such as staff transport, ITC remains blocked. In cases where the dealer is merely an agent facilitating sales on behalf of the manufacturer, ITC would also not be available for the demo vehicles.
The Board has clarified that demo vehicles do not qualify under the exclusions related to transportation of passengers or driving training. However, demo vehicles are used by dealers to promote the sale of similar vehicles, which constitutes “further supply.” Therefore, ITC on demo vehicles is allowed as they are deemed to be used for making further supply of such motor vehicles.
Availability of input tax credit on demo vehicles in cases where such vehicles are capitalised in the books of account by the authorised dealers.
Under Section 16(1) of the CGST Act, registered taxpayers are entitled to claim input tax credit (ITC) on supplies of goods or services used in the course of business, subject to prescribed conditions. “Goods” as per Section 2(52) of the Act include all movable property, and “capital goods” under Section 2(19) refers to goods capitalized in the taxpayer’s books and used in business.
Demo vehicles used by authorized dealers to promote sales qualify as “capital goods” if capitalized. ITC can be claimed on these vehicles, but if depreciation is claimed on the tax component under the Income Tax Act, ITC on that portion is disallowed (per Section 16(3)). If the demo vehicle is later sold, dealers must comply with Section 18(6) of the CGST Act regarding tax payment.
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