Automobile dealers can claim ITC on demo cars used for promoting sales: CBIC

Automobile dealers using demonstration vehicles or demo cars for promoting sales can claim input tax credit (ITC) under the GST law, the CBIC has said.

However, no ITC would be available if demo cars are used by dealers for their own purpose during the course of the business.

In a circular, the Central Board of Indirect Taxes and Customs (CBIC) said authorised dealers are required to maintain demo vehicles at their sales outlet as per dealership norms which are used for providing trial runs 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.

As per dealership norms, these vehicles may be required to be held by the authorized dealers as demo vehicle for certain mandatory period and may, thereafter, be sold by the dealer at a written down value and applicable tax is payable at that point of time.

"... Demo vehicles are used by the authorized dealers to promote further sale of motor vehicles of the similar type and therefore, such vehicles appear to be used in the course or furtherance of business of the authorized dealers. Where such vehicles are capitalized in the books of accounts by the authorized dealer, the said vehicle falls in the definition of 'capital goods'," the CBIC said.

GST law recognizes that capital goods are used or intended to be used in the course or furtherance of business and hence ITC can be claimed on it subject to other provision of the law, it added.

However, there may be some cases where motor vehicles for transportation of persons are used by an authorized dealer for purposes other than for making further supply of such motor vehicles, say for transportation of its staff employees/ management etc. In such cases, the same cannot be said to be used for making ‘further supply of such motor vehicles' and therefore, ITC in respect of such motor vehicles would not be available.

The CBIC circular further said that in cases 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 ITC on the said tax component shall not be allowed.

A 28 per cent GST, plus applicable cess, is levied on sale of cars.

Moore Singhi Executive Director Rajat Mohan said the circular recognizes that the intent of the lawmakers was not only to allow ITC on motor vehicles that are supplied as goods but also to extend this benefit to motor vehicles used for furthering the supply of similar vehicles.

Demo vehicles, employed by authorized dealers for trial runs and feature demonstrations, serve a pivotal role in aiding potential buyers' decision-making processes. As these demo vehicles directly contribute to promoting the sale of similar vehicles, they can be reasonably classified as being used for the "further supply" of such motor vehicles. Consequently, the ITC on demo vehicles is not subject to blockage under GST law," Mohan said.

Additionally, the circular carefully addresses various scenarios, including situations where demo vehicles are used solely as marketing tools or by service providers without direct involvement in sales.

"In such cases, the circular correctly disallows ITC, reflecting the government's intention to ensure that ITC is only available where there is a direct link to taxable supplies. This approach enhances compliance while supporting legitimate business activities.

"At the same time, the circular emphasizes the need for strict adherence to tax treatment and documentation requirements, including the payment of tax when demo vehicles are eventually sold. This ensures a balanced outcome that facilitates business operations while safeguarding against potential revenue loss," Mohan added.

KPMG, Indirect Tax Head & Partner, Abhishek Jain said the clarification on demo vehicles would go a long way in reducing tax costs on a critical business expenditure for the automotive sector and also bring to rest the ongoing litigation on the matter.

"A detailed clarification as this with explicit back up to the issuance not only helps bring to rest the current litigation but also reinforces Government's focus on prioritising doctrine of purposive interpretation and lawmakers intent," Jain added.