Understanding ITC for Demo Vehicles: Key Takeaways from Circular 231/25/2024-GST

key highlights from Circular No. 231/25/2024-GST:

1. Clarification on Input Tax Credit (ITC) for Demo Vehicles:
   • Authorized dealers maintain demo vehicles to provide trial runs and demonstrate vehicle features to potential buyers. These vehicles are purchased from manufacturers and are recorded as capital assets.
2. Eligibility for ITC:
   • ITC on demo vehicles, typically used for demonstration, is allowed as they are considered part of the “further supply of such motor vehicles” under Section 17(5)(a) of the CGST Act.
   • Demo vehicles are excluded from the ITC restriction if they promote the sale of similar vehicles, as this falls under further supply.
3. Conditions Where ITC is Not Available:
   • If demo vehicles are used for purposes other than further supply, such as staff transportation, ITC is not allowed.
   • If the dealer only acts as an agent or service provider for the manufacturer and does not sell the vehicle on their own account, ITC is blocked.
4. Capitalization of Demo Vehicles:
   • Demo vehicles capitalized in the dealer’s books are considered “capital goods” under Section 2(19) of the CGST Act, allowing ITC eligibility as per Section 16(1).
   • If depreciation is claimed on the tax component under the Income Tax Act, ITC on that component is not allowed.
5. Sale of Capitalized Demo Vehicles:
   • When capitalized demo vehicles are sold, the dealer must pay tax as per Section 18(6) of the CGST Act and related rules.
6. Trade Notices and Implementation:
   • The circular requests the issuance of trade notices to ensure public awareness of these clarifications and invites feedback on implementation issues.