This circular provides clarification regarding the eligibility of input tax credit (ITC) on demo vehicles maintained by authorized motor vehicle dealers for display and test drives as per dealership norms.

It clarifies that demo vehicles, though used for demonstration and trial purposes, are considered to be used for making “further supply of such motor vehicles” as they promote sales of similar vehicles. Hence, ITC on such demo vehicles is not blocked under clause (a) of Section 17(5) of the CGST Act. However, ITC will not be available if the demo vehicle is used for non-business purposes (e.g., staff transport) or where the dealer acts merely as an agent of the manufacturer rather than directly selling vehicles.

The circular further clarifies that capitalization of demo vehicles in the books of accounts does not restrict ITC eligibility, as such vehicles qualify as “capital goods” used in the course or furtherance of business. However, if depreciation is claimed on the tax component under the Income Tax Act, ITC will not be allowed on that portion. When these demo vehicles are later sold, applicable GST must be paid as per Section 18(6) of the CGST Act.