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CBIC Clarification on claiming ITC on Demo Cars

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CBIC Clarification on claiming ITC on Demo Cars

The CBIC’s clarification on the Input Tax Credit (ITC) eligibility for demo cars marks a significant resolution to an ongoing debate in the automobile industry, providing much-needed clarity for both Original Equipment Manufacturers and authorized dealers.

Confusion Around ITC for Demo Cars : Background:

Demo cars, essential for showcasing vehicles to potential customers, are typically supplied by Original Equipment Manufacturers to dealers after charging GST through valid tax invoices. Since these cars are used exclusively for business purposes like marketing and test drives, dealers naturally sought to claim Input Tax Credit on the GST paid when purchasing these vehicles.

However, Section 17(5) of the CGST Act, 2017 imposes restrictions on claiming Input Tax Credit for motor vehicles. It blocks ITC on vehicles used for the transportation of persons unless used for specific purposes, such as:

  • Further supply of such vehicles,
  • Passenger transportation,
  • Driver training.

This ambiguity, particularly regarding the meaning of “further supply,” led to conflicting Advance Rulings across different states, leaving dealers confused about whether they could claim Input Tax Credit on demo cars.

The Central Board of Indirect Taxes and Customs has clarified that automobile dealers can claim Input Tax Credit on demo cars used for promoting sales. This clarification brings relief to automobile dealers, as demo cars are an integral part of their sales and marketing strategy.

54th GST Council Meeting

Recognizing the industry’s concerns, the 54th GST Council Meeting held on September 9, 2024, finally addressed the issue. The CBIC issued Circular No. 231/25/2024-GST on September 10, 2024, providing a detailed clarification:

  • The circular clarifies that demo vehicles are considered part of the “further supply” of similar vehicles. Even though demo cars are not sold immediately, they are used for promoting the sale of vehicles, allowing Input Tax Credit on their purchase.
  • Demo vehicles capitalized in the dealer’s books of accounts qualify as capital goods under Section 2(19) of the CGST Act. Input Tax Credit remains unaffected by this capitalization, and dealers can still claim ITC on demo cars.
  • If a dealer claims depreciation on the tax component of demo vehicles under the Income Tax Act, ITC on that portion will be disallowed to prevent double benefits. The ITC will be blocked if demo cars are used for non-promotional purposes (e.g., staff transportation). Only demo cars used solely for promoting sales of similar vehicles qualify for ITC.

Clarification by Central Board of Indirect Taxes and Customs

  • Demo cars are considered business assets used for promoting sales and are essential in the automobile industry for potential customers to test and experience vehicles before purchase.
  • Since these demo cars are used for business purposes, the Goods And Services Tax paid on their purchase is eligible for Input Tax Credit under the provisions of the Central Goods And Services Tax Act, 2017.

Section Relevant for Claiming ITC on Demo Cars

  • Section 16 of the Central Goods And Services Tax Act, 2017 allows a registered person to claim Input Tax Credit on goods and services used for furtherance of business. Since demo cars are used for sales promotion, they fall under this category.

Condition of ITC Availability

  • The Input Tax Credit can be claimed only if the purchase invoice for the demo cars is properly documented and reflects the payment of GST.
  • Once the cars are disposed of or sold, any applicable Goods And Services Tax must be paid on the transaction, following the rules for capital goods under the Goods And Services Tax

Implications for the Automobile Industry

With this clarification, the confusion over ITC on demo cars has been resolved. Dealers can now claim ITC, reducing their overall tax burden and potentially passing on cost savings to consumers, making the industry more competitive.

  • This move allows automobile dealers to reduce their tax burden by claiming Input Tax Credit on demo cars used for customer demonstrations and test drives.
  • It ensures cost efficiency in their operations, aligning with the principle of avoiding tax cascading (tax on tax).

Conclusion

The CBIC’s clarification on ITC for demo cars aligns with the broader objectives of trade facilitation and compliance under GST. This move brings relief to automobile dealerships, allowing them to confidently claim ITC on demo vehicles and improving operational efficiency.  This clarification ensures that demo cars are treated as business assets, and Goods And Services Tax paid on their purchase qualifies for Input Tax Credit, promoting better cash flow management for dealers.

CBIC vide Circular No. 231/25/2024-GST dated 10.09. 2024

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