GST Input tax credit on demo cars

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Clarity on Input Tax Credit for Demo Vehicles: A Long-Awaited Relief for Automobile Dealers

ITC on demo cars

Since the introduction of the Goods and Services Tax (GST) regime in 2017, automobile dealers have been in a state of confusion regarding the availability of Input Tax Credit (ITC) on demonstration vehicles, commonly referred to as demo cars.

These vehicles, which are used to provide test drives and showcase features to potential buyers, are an essential part of the sales process for authorized car dealerships. However, despite their integral role in the business, there was no clear guideline on whether dealers could claim ITC on demo vehicles, which led to years of uncertainty and inconsistency in tax compliance.

After more than seven years, the Central Board of Indirect Taxes and Customs (CBIC) has finally issued a clarification through Circular No. 231/25/2024-GST, dated September 10, 2024. This long-overdue circular provides much-needed guidance on the eligibility of ITC for demo vehicles. As the saying goes, "Der Aaye, Durust Aaye" (better late than never), and this certainly holds true for the automobile industry, which can now breathe a sigh of relief.

The CBIC’s Clarification on ITC for Demo Vehicles

  • The demo vehicles used by authorized dealers to promote the sale of motor vehicles are eligible for ITC, as they are considered to be used in the “furtherance of business.” 
  • The circular further explained that if demo vehicles are capitalized in the dealer’s books of account, they fall under the definition of "capital goods," and " as per the CGST Act, and input tax credit is still available, provided the tax component is not claimed for depreciation under the Income Tax Act.

However, the circular makes a crucial distinction: no ITC will be available if demo vehicles are used for purposes other than promoting sales, such as for transporting employees or for personal use within the business. In such cases, the demo vehicles are not being used for “further supply,” and thus, ITC cannot be claimed.

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