Can we claim input tax credit (ITC) of GST on purchased of motor car or Two Wheeler used for demonstration or as Test Driver Vehicle ?
As per 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.
As per Section 16(1) of the GST Act, 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.
The capital goods which are used in the course or furtherance of business, are entitled for input tax credit.
As per Section 2(19), ‘capital goods’ means goods, the value of which is capitalized in the books of accounts of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
In the motor vehicle or two wheeler industries, demonstration vehicle/ Test Driver Vehicle are used as a tool for promotion of sales by providing trial run to customers & make their decision accordingly. It is a business requirement that every motor car or two wheeler dealer shall compulsorily possess the demonstration/Test Drive vehicles, buy from its principal dealer & possess with them for trial run for satisfaction of its customers. These purchases are capitalized in the books of accounts as on assets excluding tax components.
These demo cars are used for demonstration purpose for the prospective customer and after a specific period of time, they are sold off for the book value, paying the applicable taxes at that point of time.
You can claim depreciation on it till it is part of your Fixed Assets as per Income Tax Act & shown in Balance Sheet as Test Drive Vehicle.
The demo cars are being used only for a specified period. Later on, when demo cars are sold at the written down book value, applicable GST rates are applied on it at that point of time.
Input tax paid on purchase of goods used for demonstration purpose to customer can be availed as input tax credit on capital goods and set off against output tax payable under GST
So purchase of demo car is in furtherance of business, the Dealer is eligible for input tax credit.
This activity does not come under the negative clause, as after a limited period of use as demo car, the vehicles are sold & GST taxes are apply on it.
As per my view & observations stated above, conclusion is:
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.