GST credit on demo vehicles now allowed in the dealer-agency model
What changed. Paragraph 4.6 of Circular No. 231/25/2024-GST dated 10 September 2024 had said that in the dealer-agency model (the manufacturer sells vehicles directly to customers and the dealer acts only as agent), a dealer could not take input tax credit (ITC) on demo vehicles bought for test drives.
CBIC has now withdrawn that paragraph. It clarifies that ITC on demo vehicles is not blocked under section 17(5)(a) of the CGST Act for a dealer in the dealer-agency model. Its reasons:
- demo vehicles serve the same purpose in the agency model as in the traditional dealership model;
- in both models they are bought against tax invoices and usually shown as capital assets;
- section 17(5)(a)(A) refers to further supply of "such motor vehicles", which covers similar vehicles, not only the specific vehicle sold.
Who it affects. Authorised motor vehicle dealers and agents working under the dealer-agency model.
From when. The circular is dated 26 October 2026. It does not state a separate effective date for past periods.
What to do. - Review demo vehicles bought under the agency model for which ITC was not taken or was reversed, keeping in mind the time limit under section 16(4). - Where a notice or demand is pending on this issue, bring the circular to the officer's attention. - Keep invoices and the asset register for each demo vehicle.
Official source: CBIC Circular No. 262/08/2026-GST dated 26 October 2026
This is general information based on the law as on the date shown, not professional advice. Rules change often; check the current position before acting.