I. Brief background of the issues involved

In India buying a vehicle is a big family decision. Before buying a vehicle, customers always prefer to take test drives of the vehicles they are interested in, sometimes multiple test drives are taken before the decision is arrived at. With the advent of GST in 2017, question as to the eligibility of Input Tax Credit (ITC) of these demo vehicles has been in debate since then. There was near unanimity in legal circles that vehicle dealers were eligible for ITC. Then, there were multiple Advance rulings which allowed ITC and then there were few which said that ITC was not allowed. Few advance rulings said that as the dealer is capitalizing the demo vehicles in their books of accounts, ITC won’t be allowed. This circular tries to put an end to this conundrum of views.

VI. Clarification given in the circular:

1.  The intention behind the law is to allow ITC of motor vehicles based on the nature of business in which the said motor vehicle is being used. The taxable supplies, permitted for the purpose of ITC as per provisions of clause (a) of section 17(5) of CGST Act are:

a. Further supply of such motor vehicles,

b. Transportation of passengers and

c. Imparting training on driving such motor vehicles.

2. Demo vehicles are used by authorized dealers to provide trial run and to demonstrate features of the vehicle to potential buyers. Accordingly, it is to be seen whether the Demo vehicles in question can be said to be used for making “further supply of such motor vehicles”, as specified in the sub-clause.

3. Usage of the words “such motor vehicles” instead of “said motor vehicle”, in the sub-clause, implies that the intention of the lawmakers was twofold:

a. To allow ITC of the motor vehicle, which is itself further supplied,

b. To also allow ITC of the motor vehicle which is being used for the purpose of further supply of similar type of 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’ and therefore ITC of demo vehicles is allowed to them.

4. Where the authorized dealer merely acts as an agent or service provider to the vehicle manufacturer (OEM) for providing marketing service, including providing facility of vehicle test drive to the potential customers of the vehicle on behalf of the manufacturer and is not directly involved in purchase and sale of the vehicles to end customer. In such cases, the sale invoice for the vehicle is directly issued by the vehicle manufacturer to the customer. For providing facility of vehicle test drive to the potential customers of the vehicle, the dealer purchases demo vehicle from the vehicle manufacturer. The dealer may sell the said demo vehicle to a customer after a specified time or kilometers as per agreement with the vehicle manufacturer on payment of applicable GST. In such a case, the authorized dealer is merely providing marketing and/or facilitation services to the vehicle manufacturer and is not making the supply of motor vehicles on his own account. Therefore, the said demo vehicle cannot be said to be used by the dealer for making further supply of such motor vehicles and therefore in such cases, ITC in respect of such demo vehicle would not be allowed to the said dealer.

5. Demo vehicles when 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. GST law recognizes that capital goods are also eligible for ITC, accordingly, ITC on demo vehicles even if capitalized will be available to the authorized dealers, however, the dealer must not have claimed depreciation on the GST component.