GST ITC on Demo Vehicles: Dealer-Agency Model Clarified vide Circular No. 262/08/2026-GST
The Central Board of Indirect Taxes and Customs (CBIC) has issued Circular No. 262/08/2026-GST dated 26 October 2026, clarifying input tax credit on demonstration vehicles purchased by authorized agents of motor vehicle manufacturers.
The circular withdraws the earlier clarification that denied credit under the identified motor vehicle restriction in the dealer-agency model.
1. Why Was a Further Clarification Required?
The earlier circular distinguished between dealers selling vehicles on their own account and agents providing marketing or facilitation services to manufacturers.
Under that clarification, an agent who purchased a demo vehicle for test drives was denied credit because the agent did not itself supply the new vehicles to customers. (Paragraph 4.6 of Circular No. 231/25/2024-GST dated 10 September 2024)
The new circular re-examines this distinction.
2. The Motor Vehicle ITC Restriction
The relevant provision restricts credit on motor vehicles used to transport persons where the approved seating capacity is not more than 13 persons, including the driver.
The restriction contains exceptions where the vehicles are used for specified taxable supplies:
• Further supply of such motor vehicles;
• Transportation of passengers; or
• Training in driving such motor vehicles.
(Section 17(5)(a) of the CGST Act)
The clarification concerns the exception for further supply of such motor vehicles.
3. Traditional Dealership and Dealer-Agency Models
The circular explains the two business models as follows:
|
Aspect |
Traditional dealership |
Dealer-agency model |
|
Sale of new vehicles to customers |
Dealer sells on its own account |
Manufacturer sells directly |
|
Demo vehicles |
Dealer designates vehicles for demonstrations and test drives |
Agent purchases vehicles for demonstrations and test drives |
|
Purpose of demo vehicles |
Promote vehicle sales |
Promote vehicle sales |
In both models, authorized dealers purchase demo vehicles from manufacturers against tax invoices. These vehicles are typically recorded as capital assets.
They are required to be held for a mandatory demonstration period and are generally sold later at written-down value, with applicable tax payable on that sale. (Paragraphs 5 and 5.1 of the circular)
4. Why ITC Is Allowed in the Dealer-Agency Model
The circular explains that demo vehicles perform the same function in both models: allowing customers to experience a vehicle before purchasing it.
It also distinguishes the phrase “such motor vehicles” from a reference limited to the particular vehicle eventually sold. The provision therefore covers vehicles used to further the supply of similar motor vehicles. (Paragraph 6; Section 17(5)(a)(A))
On this basis, the circular concludes that demo vehicles in both models serve the purpose of furthering vehicle supplies.
5. Earlier Restriction Withdrawn
The earlier clarification denying credit in the dealer-agency model is withdrawn.
The circular expressly clarifies that credit on demo vehicles is not blocked under the identified motor vehicle provision for dealers operating under that model. (Paragraph 7; Section 17(5)(a))
The withdrawal specifically concerns paragraph 4.6 of the earlier circular.
Conclusion
Circular No. 262/08/2026-GST aligns the treatment of demo vehicles in traditional dealerships and dealer-agency arrangements under the specified ITC restriction. The clarification recognizes their common role in demonstrating vehicles and furthering sales.
To read the complete clarification and access the original circular, refer to Circular No. 262/08/2026-GST dated 26 October 2026:
https://taxinformation.cbic.gov.in/view-pdf/1003353/ENG/Circulars
Disclaimer : This article is for informational purposes only and should not be construed as legal or professional advice. Taxpayers should consult their tax advisor based on the facts of their specific case before taking any action.
