Summary: Demo vehicles are used by authorized dealers to showcase and test vehicles for potential buyers, which helps in promoting sales. According to CBIC Circular No. 231/25/2024-GST dated September 10, 2024, Input Tax Credit (ITC) on demo vehicles is permissible under Section 17(5)(a) of the CGST Act, 2017. This section generally restricts ITC on motor vehicles for passenger transport with a seating capacity of up to 13, except when used for specific purposes such as further supply, passenger transport, or driver training. Since demo vehicles are used to demonstrate and sell similar vehicles, they qualify for ITC as they contribute to furthering the sale of such vehicles. As these vehicles are considered capital goods under Section 2(19) of the CGST Act, they are eligible for ITC, provided other conditions are met. However, if depreciation on the tax component is claimed under the Income Tax Act, the ITC for that component is not allowed. Additionally, if a demo vehicle is sold after being capitalized, the dealer must pay tax under Section 18(6) of the CGST Act and Rule 44(6) of the GST Rules.
The demo vehicles are the vehicles which the authorised dealers for sale of motor vehicles are required to maintain at their sales outlet as per dealership norms and are used for providing trial run and for demonstrating features of the vehicle to the potential buyers. These vehicles are purchased by the authorised dealers from the vehicle manufacturers against tax invoices and are typically reflected as capital assets in books of account of the authorized dealers.
CBIC vide Circular No. 231/25/2024-GST dated 10.09.2024 has clarified that ITC on demo vehicles is allowed under section 17(5)(a) of CGST Act, 2017.
Clause (a) of Section 17(5) of CGST Act, 2017 provides that input tax credit shall not be available in respect of motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons(including the driver), except when they are used for making following taxable supplies, namely:
A. further supply of such motor vehicles; or
B. transportation of passengers; or
C. imparting training on driving such motor vehicles.
As demo vehicles are used by authorized dealers to provide trial run and to demonstrate features of the vehicle to potential buyers, it helps the potential buyers to make a decision to purchase a particular kind of motor vehicle. Therefore, as demo vehicles promote sale of similar type of motor vehicles, they can be considered to be used by the dealer for making ‘further supply of such motor vehicles’.
Accordingly, input tax credit in respect of demo vehicles is not blocked under clause (a) of section 17(5) of CGST Act, as it is excluded from such blockage in terms of sub-clause (A) of the said clause
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 the business. The capital goods which are used in the course or furtherance of business, may therefore, be entitled for Input Tax Credit (ITC). However, the entitlement for input tax credit is subject to restrictions stipulated in section 17(5) of CGST Act, 2017.
Where such vehicles are capitalized in the books of accounts by the authorized dealer, the said vehicle falls in the definition of “capital goods” under section 2(19) of CGST Act, 2017.
As per provision of section 16(1) of CGST Act, subject to such conditions and restrictions as may be prescribed, a recipient of goods is entitled to take input tax credit in respect of tax charged on the inward supply of any goods, which as per definition of “goods” under section 2(52) of CGST Act, includes even capital goods. Further, section 2(19) of CGST Act also recognizes that capital goods are used or intended to be used in the course or furtherance of business.
Accordingly, availability of input tax credit on demo vehicles is not affected by way of capitalization of such vehicles in the books of account of the authorized dealers, subject to other provisions of the Act.
Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the Income Tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
It is further mentioned that in case demo vehicle, which is capitalized, is subsequently sold by the authorized dealer, the authorized dealer shall have to pay an amount or tax as per provisions of section 18(6) of CGST Act read with rule 44(6) of the Central Goods and Service Tax Rules, 2017.
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