Indirect Tax Update No. 37

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Demo vehicles – ITC admissibility to authorised agents appointed by manufacturers for sale of motor vehicles

Background:

The Central Board of Indirect Taxes & Customs (CBIC) has issued Circular No. 262/08/2026-GST dated 26 October 2026 clarifying the issues regarding availability of input tax credit in respect of demo vehicles, in addition to the clarification provided in Circular No. 231/25/2024-GST dated 10 September 2024.

Issue:

Whether Input Tax Credit (ITC) is admissible on demo vehicles purchased by authorised agents appointed by vehicle manufacturers under the dealer-agency model and traditional dealership-based model?

Earlier clarification:

Paragraph 4.6 of Circular No. 231/25/2024-GST dated 10 September 2024 clarified that ITC on demo vehicles was blocked under Section 17(5)(a)(A) of the CGST Act in the dealer-agency model, as the dealer was not making the supply of motor vehicles on his own account and was merely providing marketing or facilitation services to the manufacturer.

**Revised clarification vide Circular No. 262/08/2026-GST dated 26 October 2026:**

In case of traditional model, the dealer purchases a fleet of new vehicles and sells the same on its own account to customers.
In dealer-agency model the new vehicle sales are done directly by the OEM to the customer.
The present clarification is based on the premise that demo vehicles serve the same purpose of enabling customers to experience the vehicle before purchase in both business models.
In both the models, such vehicles are purchased by authorised dealers from manufacturers against tax invoices and are typically recorded as capital assets.
The demo vehicles are generally retained for a mandatory period and generally, subsequently sold at their written-down value, with applicable tax paid on the sale.
The Circular refers to the provisions of Clause (a) of sub-section (5) of Section 17 of the CGST Act, which inter alia 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) unless they are used for further supply of such motor vehicles.
The expression “such motor vehicles” rather than “said motor vehicle” in Section 17(5)(a)(A) of the CGST Act permits ITC on vehicles used for further supply of similar motor vehicles. 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 types of business models
Accordingly, the Circular No. 262/08/2026-GST dated 26 October 2026 withdraws the clarification contained in paragraph 4.6 of the earlier circular and clarifies that ITC on demo vehicles is not blocked under Section 17(5)(a) of the CGST Act under both dealer-agency model and traditional dealership-based model.