The Central Board of Indirect Taxes and Customs (CBIC) has clarified that input tax credit (ITC) on demonstration vehicles purchased by authorised motor vehicle dealers operating under the dealer-agency model is not blocked under Section 17(5)(a) of the Central Goods and Services Tax Act, 2017.
Through Circular No. 262/08/2026-GST dated October 26, 2026, the Board has withdrawn paragraph 4.6 of its earlier Circular No. 231/25/2024-GST dated September 10, 2024, which had denied such credit where dealers merely provided marketing or facilitation services and the manufacturer sold vehicles directly to customers.
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The clarification addresses representations from trade and industry seeking clarity on the availability of ITC on demo vehicles purchased by authorised agents appointed by vehicle manufacturers. Issued under Section 168(1) of the CGST Act, it seeks to ensure uniform implementation across GST field formations.
The earlier circular had drawn a distinction based on the manner in which new vehicles were sold to customers. Under the dealer-agency model, the authorised dealer does not supply new vehicles to customers on its own account. Instead, the Original Equipment Manufacturer (OEM) makes the sale directly, while the dealer provides marketing, facilitation and test-drive services.
Paragraph 4.6 of the September 2024 circular had consequently treated demo vehicles purchased by such dealers as ineligible for the exception relating to the further supply of motor vehicles. Its reasoning was that the dealer itself was not making the supply of vehicles and, therefore, the demo vehicle could not be regarded as being used by the dealer for making further supplies of such vehicles.
The latest circular revisits this position by examining the commercial purpose and treatment of demonstration vehicles under both the dealer-agency model and the traditional dealership model.
In a traditional dealership arrangement, the dealer purchases a fleet of new vehicles from the manufacturer and earmarks some of them for demonstrations and test drives. The dealer subsequently sells new vehicles to customers on its own account.
Under the dealer-agency model, the dealer purchases vehicles from the OEM for demonstration or test-drive purposes, while the OEM directly sells new vehicles to customers. Although the identity of the person making the customer-facing sale differs, the Board has recognised that demo vehicles perform the same function in both arrangements: enabling prospective customers to experience a vehicle before purchasing it.
The statutory restriction examined in the circular is contained in Section 17(5)(a) of the CGST Act. This provision blocks ITC on motor vehicles used for transporting persons where the approved seating capacity does not exceed 13 persons, including the driver, subject to specified exceptions.
Those exceptions cover vehicles used for making taxable supplies involving the further supply of such motor vehicles, transportation of passengers, or imparting driving training.
The central issue was whether demo vehicles purchased by an authorised dealer could fall within the exception for further supply when the actual sale of new vehicles to customers was undertaken directly by the manufacturer.
The Board has now placed emphasis on the wording of Section 17(5)(a)(A). According to the circular, the use of the expression “such motor vehicles”, instead of wording referring only to the particular vehicle, indicates that the exception extends beyond the specific vehicle ultimately sold.
On this interpretation, ITC is permitted not only on a vehicle that is itself sold, but also on vehicles used to further the supply of similar motor vehicles. Since demo vehicles support the sale of similar vehicles under both business models, the Board has concluded that credit should be available in both cases, including the dealer-agency model.
The circular also highlights similarities in the ownership, accounting and eventual disposal of demo vehicles under the two arrangements.
In both models, authorised dealers purchase demo vehicles from manufacturers against tax invoices. These vehicles are typically recorded as capital assets in the dealers’ books of account. Dealers are required to retain them for a mandatory demonstration period, after which they are generally sold at their written-down value, with applicable tax payable at that stage.
The Board further noted that these vehicles receive equivalent treatment under the Central Motor Vehicles Rules, 1989. Taken together, these factors led it to conclude that there was no practical difference in their treatment that justified denying credit solely because a dealer operated under the agency model.
The circular expressly observes that denying ITC to one business model creates a discriminatory effect in the availability of credit on such vehicles.
Accordingly, paragraph 4.6 of the September 2024 circular stands withdrawn. The operative clarification states that ITC on demo vehicles is not blocked under Section 17(5)(a) for dealers operating under the dealer-agency model.
For authorised vehicle agents, the clarification removes the specific basis for denial arising from the fact that the OEM, rather than the dealer, invoices and sells new vehicles directly to customers. It recognises the role of demonstrations and test drives in promoting the supply of similar vehicles, irrespective of the sales model adopted.
However, the clarification concerns the blocking provision under Section 17(5)(a); it should not be read as dispensing with other applicable requirements for claiming ITC. The circular does not separately prescribe a retrospective effective date or a procedure for reclaiming credit previously denied or reversed.
The Board has directed that suitable trade notices be issued to publicise the clarification. Difficulties in its implementation may be brought to its notice.
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