The Government of West Bengal on October 4th 2024 issued clarifications on the availability of input tax credit in respect of demo vehicles used by authorized dealers of motor vehicles. This circular clarifies critical issues surrounding the GST treatment of demo vehicles, their use in business operations, and the implications for authorized dealers.
Demo Vehicles
Demo vehicles are those maintained by authorized dealers for the purpose of providing potential buyers with trial runs and demonstrations of vehicle features. These vehicles are typically purchased from manufacturers and are recorded as capital assets in the dealers’ books. As per dealership norms, demo vehicles must be held for a specific duration before they can be sold, usually at a written-down value, upon which applicable GST is payable.
Key Issues Addressed in the Circular
1. Input Tax Credit Availability on Demo Vehicles
The circular primarily addresses two key questions regarding the availability of input tax credit:
- ITC on Demo Vehicles with a Seating Capacity of Not More Than 13: Section 17(5) of the West Bengal Goods and Services Tax Act, 2017 (WBGST Act) states that input tax credit shall not be available for motor vehicles designed for the transportation of passengers with an approved seating capacity of not more than 13, unless they are used for specific taxable supplies.
- ITC on Capitalized Demo Vehicles: The circular also discusses the implications of capitalizing demo vehicles in the dealers’ accounts and how it affects their entitlement to input tax credit.
2. ITC Restrictions and Exceptions
Restrictions Under Section 17(5)
Clause (a) of Section 17(5) specifies that input tax credit is blocked for certain motor vehicles unless they are used for:
- Further supply of such motor vehicles
- Transportation of passengers
- Imparting training on driving such motor vehicles
Clarifications Regarding Demo Vehicles
- Use for Further Supply: While demo vehicles cannot be classified under the exceptions for transporting passengers or driving training, they are considered as facilitating the further supply of similar motor vehicles. The rationale is that demo vehicles help potential buyers make informed purchasing decisions, thereby promoting sales.
- Conclusion on ITC Availability: Therefore, since demo vehicles are used to promote the sale of similar vehicles, they are deemed to be utilized for making “further supply.” As a result, input tax credit for demo vehicles is not blocked under the aforementioned section.
3. Exceptions for Different Use Cases
The circular notes that in cases where demo vehicles are utilized for purposes other than promoting further sales, such as transporting employees, input tax credit would not be available.
Additionally, if an authorized dealer acts merely as an agent for the manufacturer (providing marketing services including test drives), and the sale invoice is issued directly by the manufacturer, the dealer cannot claim ITC on the demo vehicle used for these purposes.
Capitalization of Demo Vehicles and ITC
1. Capital Goods Definition
Demo vehicles that are capitalized in the books of account are considered capital goods under section 2(19) of the WBGST Act, which defines capital goods as goods that are capitalized and used in the course of business.
2. Eligibility for Input Tax Credit
- Claiming ITC: As long as the demo vehicles are used in the course of business, and given that they can be classified as capital goods, dealers are entitled to input tax credit on the GST paid on these vehicles.
- Depreciation Consideration: If dealers claim depreciation on the tax component of the demo vehicles under the Income Tax Act, they cannot claim ITC on that portion as per section 16(3) of the WBGST Act.
3. Subsequent Sale of Capitalized Vehicles
For a dealer to sell a demo vehicle that has been capitalized, they must pay the applicable tax as stipulated under section 18(6) of the WBGST Act.
Difficulty, if any, in the implementation of this Trade Circular may be brought to the notice of the Commissioner.
