The issue of claiming Input Tax Credit (ITC) on motor vehicles under the Goods and Services Tax (GST) regime has always been a subject of debate and confusion. With the introduction of GST, the availability of ITC on cars and other motor vehicles was substantially restricted. However, the recent clarifications issued by the Central Board of Indirect Taxes and Customs (CBIC) have helped clear some of the ambiguities, especially for businesses like motor vehicle dealers.
In this article, we will explore the new guidelines regarding ITC on cars, particularly the provisions related to demo vehicles, and provide a detailed explanation of when ITC can and cannot be claimed.
General ITC Rules for Motor Vehicles
As per Section 17(5)(a) of the CGST Act, ITC is blocked on motor vehicles for the transportation of passengers having a seating capacity of up to 13 persons, including the driver. This means that businesses typically cannot claim ITC on such vehicles unless they meet certain exceptions:
- Further Supply: If the vehicle is purchased with the intention of reselling it or leasing it, the ITC can be claimed.
- Passenger Transport: Vehicles used for transporting passengers, such as taxis or buses, qualify for ITC.
- Driving Instruction: Vehicles used in driving schools for imparting driving instruction are eligible for ITC.
If your business involves any of these activities, you are entitled to claim ITC on motor vehicles used for these purposes
ITC on Demo Vehicles: The New Circular
In a significant move, the CBIC issued Circular No. 231/25/2024-GST in September 2024, providing much-needed clarity on ITC for demo vehicles. These vehicles are widely used by motor vehicle dealerships to allow potential buyers to test drive cars before making a purchase.
Key Highlights of the Circular:
Demo Vehicles as Tools for Further Supply:
Demo vehicles, though not sold immediately, are used by dealers to promote the sale of similar models. This activity qualifies under the “further supply” category, meaning the dealer is allowed to claim ITC.
The Circular clarifies that demo vehicles are essential for the sale of other vehicles, and therefore, ITC can be availed, provided these vehicles are ultimately sold after their use as demo cars(Aaerm Law Associates).
Restrictions on Non-Supply Usage:
If a dealer uses the demo vehicles for other purposes, such as transporting employees or marketing services not directly linked to the supply of vehicles, ITC will be blocked.
Vehicles used primarily for marketing or promotion, without direct involvement in sales, are not eligible for ITC.
Capitalization of Demo Vehicles:
Even if demo vehicles are capitalized in the dealer’s books, ITC can still be claimed, as long as the vehicle is used for furthering sales and not for claiming depreciation under the Income Tax Act. This ensures that businesses are not denied the tax credit simply due to the accounting treatment of the vehicles(TaxGuru).
Implications for Other Businesses
For businesses that are not involved in the sale or leasing of motor vehicles, the rules remain largely unchanged. ITC on cars purchased for personal use, staff transportation, or general business activities is not allowed. This means companies cannot claim ITC on vehicles bought for management, sales teams, or other operational purposes that do not fit the exception categories.
However, businesses in the transportation industry, or those involved in vehicle leasing, can still claim ITC as long as the vehicles are used directly in furtherance of taxable supplies.
The new CBIC clarification on ITC for demo vehicles offers much-needed relief for motor vehicle dealers, ensuring they can claim tax credit on vehicles used for test drives and demonstrations. However, for most businesses, the restrictions under Section 17(5)(a) of the CGST Act continue to block ITC on motor vehicles for general use, limiting it only to specific cases of further supply, passenger transport, or driving instruction. Understanding these guidelines is crucial for businesses to avoid costly mistakes in tax credit claims. If you operate in the automobile industry or deal with motor vehicle leasing, it’s essential to stay updated on these rules to maximize your ITC claims while remaining compliant with the law – JSPCO
