Input Tax Credit on Demo Cars Under GST

Ms. Poonam Jangid

Who are vehicle dealers?

A dealer is a person who is involved in any motor vehicle dealership or supply or distribution, i.e., a business that sells new or used cars at the retail level, based on a dealership contract with an automaker (manufacturer).

Any automobile dealership employs automobile sales people and automotive technicians to sell their automotive vehicles, provide maintenance services for vehicles, stock and sell spare automobile parts and process warranty claims, etc.

Demo cars

A demonstration vehicle (or demo) is a new vehicle (car or any other vehicle) that has been driven by the dealership’s salesmen, managers or executives but has never been registered with the state, therefore, it is not considered ‘used’ even though it was driven. Demo vehicles are typically well maintained as they are used to illustrate the vehicles and promote sales at the dealership. These demo vehicles are used for demonstration purpose for the prospective customers and after a specific period of time, they are generally sold off for the book value, paying the applicable taxes at that point of time.

In the motor vehicle industry, demonstration vehicle is an indispensable tool for promotion of sales by providing trial run of vehicle to customers. It is a business requirement that motor vehicle dealer has to acquire the demonstration vehicles from principal supplier. These purchases are capitalized in the books of account excluding the tax component.

Nature of demo car : a capital good or input for dealer?

As per section 2(19) of the CGST Act, 2017 “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

As per section 2 (59) of the CGST Act, 2017 “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

Therefore, a demo vehicle can be either a input or a capital good. Going by the aforesaid definitions, demo vehicle may be considered as a capital asset as it is used for furtherance of business and it is not meant for retail sale to customers. If the demo car is being capitalized in books of accounts, it will be considered as capital asset. If not so, it may be an input.

Will a dealer get Input Tax Credit (ITC) on demo vehicle?

According to section 16(1) of the CGST Act, 2017,  every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business.

According to section 17(5) of CGST Act, 2017,  input tax credit will not be available in respect of motor vehicles and other conveyances,  except when such motor vehicles or other conveyances are supplied further, or used for transportation of passengers or giving training on driving, flying, navigating such vehicles or conveyances or are used for transportation of goods.

The capital goods which are used in the course or furtherance of business, may therefore, be entitled for Input Tax Credit (ITC).

For determining the eligibility of ITC on demo cars, the only test required is to  ascertain is whether it is covered under section 17(5) (a) of CGST Act, 2017, according to  which input tax credit will be allowed only in following three cases :

(i) Further supply of such vehicles or conveyances:

In this case, demo vehicles is used for furtherance of supply of such vehicles (such as demo car) as the prospective buyer is subjected to training about the features of the car and how to use them and is also used for driving including the test drives.

(ii) Transportation of passengers :

Demo cars are not used for transportation of passengers.

(iii) Imparting training on driving, flying, navigating such vehicles or conveyances:

In this case, demo cars are used for imparting training about the features of the car and training on driving such vehicles to the prospective buyer by which it would appear that ITC on demo vehicles may be availed.

Advance Rulings

Recently, few advance ruling have been pronounced which also endorse the view that dealers are allowed ITC on capital goods being demo cars

• In A. M. Motors (2018) 18 GSTL 93 (AAR, Kerala), the assessee sought for advance ruling on whether input tax credit on the motor car purchased for demonstration purpose of the customer can be availed as credit on capital goods and set off against output tax payable under GST in the case of a motor car dealer.

The Authority for Advance Ruling ruled that input tax paid by a vehicle dealer on the purchase of motor car used for demonstration purpose of the customer can be availed as input tax credit on capital goods and set off against output tax payable under GST.

• In Chowgule Industries (P.) Ltd. (2019) 107 taxmann.in 293 (AAR, Goa), where applicant purchased demo vehicles for promotion of sale by providing trial run to customer against tax invoices from supplier after paying taxes and capitalized purchase of such vehicles in books of account, it was held that capital goods which are used in the course or furtherance of business are entitled for Input Tax Credit, and thus, Input Tax Credit on motor vehicle purchased for demonstration purpose can be availed as Input Tax Credit on capital goods and set off against output tax payable under GST.

Conclusion

It can be said that eligible taxes paid on purchase of demo cars meant for use in course of furtherance of business and which is capitalized in the books of accounts shall be allowed to be set off as Input Tax Credit (ITC) under the GST law.