The Central Board of Indirect Taxes and Customs (CBIC) has reportedly withdrawn its earlier clarification restricting input tax credit (ITC) on demo vehicles used for test drives under the dealer-agency model. The development is significant for automobile dealers and businesses involved in vehicle marketing, as it revisits the interpretation of Section 17(5)(a) of the Central Goods and Services Tax Act, 2017.

1. Background: Earlier Position Under Circular No. 231/25/2024-GST

CBIC Circular No. 231/25/2024-GST, dated 10 September 2024, clarified the availability of ITC on demo vehicles used by authorised automobile dealers.

Under paragraphs 4.3 to 4.6 of the circular, ITC was generally permitted where demo vehicles promoted the further supply of similar motor vehicles. However, paragraph 4.6 specifically denied ITC where a dealer acted merely as an agent or service provider to the manufacturer, with the manufacturer issuing the sale invoice directly to the customer. Read the 2024 CBIC circular.

2. What Has Changed Under Circular No. 262/08/2026-GST?

As reported in connection with CBIC Circular No. 262/08/2026-GST, dated 26 October 2026, the earlier clarification in paragraph 4.6 of Circular No. 231/25/2024-GST has been withdrawn. The change addresses the different treatment previously applied to dealers operating under the agency model. Read the reported circular update.

The key implications are:

• Dealer-agency model: ITC on demo vehicles used for customer test drives is no longer blocked merely because the manufacturer directly sells the vehicles to customers.

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• Traditional dealership model: The existing principle allowing ITC on demo vehicles used to promote further supplies of similar vehicles continues to apply.

• Business purpose: Demo vehicles facilitate customer evaluation and promote the sale of similar motor vehicles, supporting the argument that they are used for further supply under Section 17(5)(a)(A) of the CGST Act, 2017.

The withdrawal removes the specific restriction previously applied to the dealer-agency arrangement.

3. Important Compliance Considerations for Automobile Dealers

Although the clarification is favourable, dealers should review the facts and applicable statutory conditions before claiming ITC.

Key points to consider include:

• Maintain valid tax invoices and records establishing the business use of demo vehicles.

• Ensure that the vehicles are used for customer demonstrations and test drives in the course or furtherance of business.

• Review Section 16 of the CGST Act, 2017, including the restriction under Section 16(3) where depreciation is claimed on the GST component of capitalised vehicles.

• Examine the GST treatment applicable when demo vehicles are subsequently sold, including the requirements under Section 18(6) and Rule 44(6), where applicable.

The reported circular does not specify a separate effective date or detailed procedure for dealing with previously unclaimed credits. Dealers should therefore assess any past-period claims separately.

4. Conclusion

The withdrawal of paragraph 4.6 of Circular No. 231/25/2024-GST is a positive development for automobile dealers operating under the dealer-agency model. It aligns the treatment of demo vehicles more closely with their commercial purpose of promoting further supplies of similar motor vehicles.

Automobile dealers should review their existing ITC positions, supporting documentation and accounting treatment in light of the revised clarification. The original circular should be consulted before taking action, as the official text of Circular No. 262/08/2026-GST could not be independently retrieved during this research.