CBIC Reverses Stand, Allowing ITC on Demo Vehicles Under Dealer-Agency
Model
The Central Board of Indirect Taxes &
Customs (CBIC) has issued Circular No. 262/08/2026-GST dated October 26,
2026. This circular provides a highly anticipated relief to the automobile
sector by expanding Input Tax Credit (ITC) eligibility on test drive/demo
vehicles.
Key
Highlights & Clarifications
·
Withdrawal of Previous Restriction: The CBIC
has explicitly withdrawn its earlier restriction under para 4.6 of Circular
No. 231/25/2024-GST (dated September 10, 2024). The previous rule blocked
ITC for agents under the "dealer-agency model" because the final
passenger cars are billed directly by the Original Equipment Manufacturer (OEM)
to customers, meaning the agent does not sell vehicles on their own account.
·
Parity Between Business Models: The
Board observed that in both traditional dealerships (where the dealer sells
from their own inventory) and the modern dealer-agency model, demo cars serve
the exact same business purpose: allowing prospective buyers to experience a
test drive to facilitate final vehicle sales. Denying ITC to one specific model
created an unfair, discriminatory tax structure.
·
Legal Interpretation of Section 17(5): The CBIC
highlighted that Section 17(5)(a)(A) of the CGST Act explicitly uses the phrase
“such motor vehicles” rather than “said motor vehicle”. This legal
wording confirms that credit is not confined strictly to the exact physical
unit being sold, but extends to vehicles deployed to promote and make further supplies of similar motor vehicles.
·
Final Status: Input Tax Credit on demo
vehicles purchased against tax invoices by authorized agents is no longer
blocked under Section 17(5), bringing much-needed cost optimization across
luxury and modern electronic vehicle (EV) ecosystems utilizing agency networks.
[GST Circular No. 262/08/2026-GST dated October 26, 2026]
Attention is invited to circular
No. 231/25/2024-GST dated 10.09.2024, wherein certain issues regarding availability of input tax credit in respect
of demo vehicles were clarified.
2.
Representations have been received
from trade and industry seeking clarification
with regard to the admissibility of input tax credit
(ITC) on demo vehicles to authorized agents
appointed by vehicle manufacturers for sale of motor vehicles,
in light of para 4.6 of circular No. 231/25/2024-GST dated 10.09.2024 (hereinafter referred to as “the said circular”). In order
to ensure uniformity in the implementation of the provisions of law in this regard across the field formations, the Board, in exercise
of its powers conferred
by section 168 (1) of the Central
Goods and Services Tax Act, 2017 (hereinafter referred
to as “the CGST Act”), hereby clarifies the issue as under:
3.
Vide para 4.6 of the said circular,
it was clarified
that in case where an authorized dealer
merely acts as an agent or service
provider to the vehicle
manufacturer (hereinafter referred to as the “dealer-agency model”), input tax credit in respect of a demo vehicle
purchased by such authorized dealer for providing
facility of vehicle
test drive would be blocked
in terms of sub-clause (A) of clause
(a) of section
17(5) of the CGST Act, 2017, as such an agent is not making the supply of motor vehicles on his own account
and is merely
providing marketing
or facilitation services
to the vehicle
manufacturer. The relevant
extract is reproduced as under:
4.6 …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.
Accordingly, in such cases, input tax credit
in respect of such demo vehicle
would not be excluded
from blockage in terms of sub-clause (A) of clause
(a) of section 17(5) of CGST Act and therefore, input tax credit on the same would not be available
to the said dealer.
4.
Clause (a) of sub-section (5) of section 17 of the CGST Act, provides
for the restriction on the availability of ITC in respect of motor vehicles
for transportation of persons having approved
seating capacity of not more than
13 persons (including the driver).
The said clause reads as under:
“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit
shall not be available in respect
of the following, namely:
-
(a)
motor vehicles for transportation of persons having approved
seating capacity of not more than thirteen persons (including the driver),
except when they are used for making
the 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
5.
The matter
has been examined. As per the prevailing practice in respect
of vehicle sales, it is seen that primarily
there are two kinds of models of sale in this sector,
i.e., the dealer-
agency model and the traditional dealership-based model.
In the dealer-agency model,
the dealer purchases
new vehicles from the Original Equipment Manufacturer (OEM) as are required
for demo or test drive purposes. New vehicle sales are done directly
by the OEM to the customer. In the traditional dealership-based model, the dealer purchases a fleet of new vehicles
and designates a few of these as demo vehicles for test drive purposes to promote vehicle sales.
5.1. The basic difference between the two models is that in the traditional model, the sale of vehicles
is done by the dealer on its own account while in the dealer-agency model,
the sale of vehicle to customers is done
directly by the OEM and the dealer only keeps demo vehicles for the purpose of demonstration and for demo test drive purposes. However, in both the cases, the demo vehicles
serve the same purpose of allowing
the customer to have the driving experience before actually
buying the car. In both the models,
these demo vehicles
are purchased by the authorized dealers from the vehicle manufacturers against tax invoices
and are typically
reflected as capital assets in books of account
of such authorized dealers. These vehicles
are required to be
held by authorized dealers as
demo vehicles for certain mandatory period and are thereafter, generally, sold by
the dealer at a written down value and applicable tax on the same is payable at that point of time. Also, such vehicles
are treated at par under the Central Motor Vehicle
Rules, 1989. Thus, there is no practical
difference in the treatment
of these vehicles, and denial of ITC to one
business model creates a discriminatory effect on the
availability of ITC on such vehicles.
6.
Further, the use of the phrase “such
motor vehicles” rather than “said motor vehicle” in section 17(5)(a)(A) of the CGST Act, 2017, indicates
that ITC is permitted
not only on the specific vehicle sold, but also on vehicles
used for further supply of similar motor vehicles. Thus, since demo vehicles
in both the above types of business
model serve the same purpose of furthering the supply of similar vehicles, ITC should be allowed on such demo vehicles in both type of business models, including the dealer-agency model.
7.
Accordingly, the clarification issued vide para 4.6 of circular
No. 231/25/2024-GST dated 10.09.2024 is hereby withdrawn
and it is clarified
that the input tax credit on the demo vehicles
is not blocked under clause
(a) of section 17(5) of the CGST
Act, to the dealer in the dealer-agency model.
8.
It is requested that suitable
trade notices may be issued
to publicize the contents of this circular.
9.
Difficulty, if any, in the implementation of this circular may be brought
to the notice of the Board.