Summary: CBIC, through Circular No. 262/08/2026-GST dated 26 October 2026, has withdrawn paragraph 4.6 of Circular No. 231/25/2024-GST, removing the earlier restriction on input tax credit (ITC) for demonstration vehicles used by automobile dealers operating under the dealer agency model. Previously, ITC was denied where manufacturers sold vehicles directly to customers and dealers merely facilitated sales, despite purchasing and subsequently selling demo vehicles. The revised clarification recognises that demo vehicles serve the same commercial purpose under both traditional dealership and agency models. Accordingly, the exception under Section 17(5)(a)(A) of the CGST Act concerning further supply of such motor vehicles applies to eligible demo vehicles used in the agency model. Other conditions, including Section 16(3) concerning depreciation on the GST component, continue to apply. Dealers may examine previously denied or reversed ITC, subject to statutory time limits, while the withdrawal also provides grounds for contesting pending demands and appeals. The circular does not expressly address retrospective operation or override Section 16(4).
Demo Vehicles and the Dealer Agency Model: CBIC Withdraws Para 4.6 of Circular 231
Two years ago Circular No. 231/25/2024 GST dated 10.09.2024 settled most of the questions on input tax credit for demo vehicles. It said that a dealer who buys demo cars for test drives and later sells them is using them for further supply of such motor vehicles within the meaning of Section 17(5)(a)(A), and credit is therefore not blocked. But paragraph 4.6 of that circular carved out one situation. Where the dealer was merely an agent or service provider of the manufacturer, with the manufacturer selling the car directly to the customer, the dealer was said to be providing marketing or facilitation services and not supplying motor vehicles on its own account. Credit on the demo vehicle in that model was held to be blocked.
That carve out has now been withdrawn by Circular No. 262/08/2026 GST dated 26.10.2026. The change is small in text but significant for a growing segment of the automobile trade.
The two models
The circular describes the two models as they operate on the ground. In the traditional dealership model, the dealer buys a fleet of vehicles from the manufacturer, designates a few of them as demo vehicles, and sells the rest to customers on its own account. In the dealer agency model, which several manufacturers have moved to in recent years, the manufacturer sells the car directly to the customer and the dealer only facilitates the sale, earns a commission, and buys from the manufacturer only those vehicles it needs for demonstration and test drives.
Why the distinction did not hold
The circular’s reasoning is practical. In both models the demo vehicle serves exactly the same purpose, which is to let the customer drive the car before buying it. In both models the dealer buys the demo vehicle from the manufacturer against a tax invoice, capitalises it in its books, holds it for the mandatory period, and then sells it at written down value and pays tax on that sale. The Central Motor Vehicle Rules treat the vehicles alike. The circular acknowledges that there is no practical difference in the treatment of these vehicles and that denying credit to one model while allowing it to the other creates a discriminatory effect.
The legal hook is the wording of Section 17(5)(a)(A) itself, which excludes from the block motor vehicles used for making further supply of such motor vehicles. The Board reads the phrase such motor vehicles, as against said motor vehicle, to mean that credit is allowed not only on the specific vehicle sold but on vehicles used for furthering the supply of similar vehicles. A demo vehicle in the agency model furthers the supply of similar vehicles just as much as it does in the dealership model, even though the invoice to the customer is raised by the manufacturer. On that reading the exclusion applies and the credit is not blocked.
What has changed
Paragraph 4.6 of Circular 231 stands withdrawn. It is now clarified that input tax credit on demo vehicles is not blocked under Section 17(5)(a) for the dealer in the dealer agency model. Everything else in Circular 231 continues, including the clarification that where a demo vehicle is capitalised, credit is available subject to Section 16(3), which means depreciation under the Income Tax Act should not be claimed on the tax component.
Practical consequences
Dealers who switched to the agency model and reversed or did not take credit on demo vehicles in reliance on paragraph 4.6 will want to know whether that credit can now be claimed. The answer depends on the time limit in Section 16(4). For invoices within the period still open under Section 16(4) the credit can be availed. For older invoices the time limit will stand in the way unless the credit was availed and then reversed under protest, in which case a reclaim with reference to the withdrawal of paragraph 4.6 is worth examining, bearing in mind that the circular does not expressly say it operates retrospectively.
Where demands have been raised or confirmed on this ground, the withdrawal gives a clear basis for the reply or the appeal. A clarificatory circular that withdraws an earlier restriction is generally understood as declaring what the law always was, and an adjudicating or appellate authority should have no difficulty applying it to pending matters. Pending appeals on this issue should be supplemented with a copy of this circular.
It is worth pausing on the fact that the Board has reversed itself on the strength of the words such motor vehicles. The same phrase was in the statute when Circular 231 was issued. What changed is that the trade made out a case on parity of treatment and the Board accepted it. That is a reminder that paragraph level carve outs in circulars are not beyond revisiting when the commercial reality is placed before the Board with clarity.
