GST Implications on Demonstration Vehicles for Car Dealerships in India
This article elucidates the Goods and Services Tax (GST) implications for car dealerships regarding demonstration vehicles. It details how GST applies to the initial purchase and subsequent sale of these cars, clarifying that merely offering a test drive does not constitute a taxable supply. The discussion covers the dealer's liability for GST payment, the available concessional and standard GST rate schemes based on vehicle type and credit claims, and the eligibility for Input Tax Credit on such assets.
Automobile dealerships typically acquire vehicles for sales, but some of these vehicles are designated for customer demonstrations. This article explores the Goods and Services Tax (GST) implications concerning these demonstration cars.
GST Applicability on Demonstration Vehicles
For an activity or transaction to be categorized as a 'supply' under GST, it must meet specific criteria:
- It must involve goods, services, or a combination of both.
- The activity must be carried out by a person.
- An agreement must exist.
- Consideration must be exchanged.
When car dealerships procure vehicles for demonstration purposes, this initial purchase (inward supply) fulfills all the aforementioned conditions, thereby attracting GST. Conversely, simply permitting a customer to test drive a demonstration car does not constitute an outward supply because no consideration is involved, and thus, no GST applies at that stage. GST becomes relevant only when these demonstration vehicles are eventually sold as used goods.
Responsibility for GST Payment on Demo Cars
In instances where a demonstration vehicle is sold as a pre-owned car, the car dealer, acting as the supplier, is responsible for collecting and remitting the applicable GST to the government under the forward charge mechanism.
GST Rates for Demonstration Vehicles
When a demonstration vehicle is sold, the applicable GST rates are generally calculated on the profit margin (the difference between the sale price and the purchase price). Car dealerships have two primary choices:
Option 1: Concessional Rate Scheme
As outlined in Notification No.-8/2018 Central Tax (Rate) dated January 25, 2018, this scheme offers reduced GST rates:
| S. No. | HSN | Description of Goods | GST Rate (CGST + SGST) |
|---|---|---|---|
| 1 | 8703 | Used motor vehicles, including those powered by petrol, LPG, or CNG, with an engine capacity of 1200 cc or more and a length of 4000 mm or greater. | 18% |
| 2 | 8703 | Used diesel-powered motor vehicles with an engine capacity of 1500 cc or more and a length of 4000 mm. | 18% |
| 3 | 8703 | Used motor vehicles, commonly known as Sports Utility Vehicles (SUVs) and utility vehicles, with an engine capacity exceeding 1500 cc. | 18% |
| 4 | 87 | All other categories of used vehicles not specified above. | 12% |
These concessional rates are contingent upon meeting specific conditions:
- If a registered individual has claimed depreciation on the goods under Section 32 of the Income Tax Act, 1961, the margin is calculated as the selling price (consideration received) minus the depreciated value of the goods on the date of supply. A negative margin is disregarded (treated as zero).
- In other scenarios, the margin is the difference between the selling price and the purchase price. Any negative margin is similarly ignored.
- No Input Tax Credit (ITC) or CENVAT credit must have been claimed at the time of purchase.
Option 2: Standard GST Rate
Under this alternative, the car dealer can claim applicable Input Tax Credit (ITC) or CENVAT credit and levy GST at the standard rate of 28% on the outward supply. Additionally, a compensation cess, ranging from 1% to 22%, will be applied as appropriate.
Input Tax Credit (ITC) Eligibility for Demonstration Vehicles
Input Tax Credit (ITC) for motor vehicles with a seating capacity below 13 individuals is typically considered 'blocked credit' as per Section 17(5) of the CGST Act. Nevertheless, an exemption exists when the registered individual, such as a car dealer, engages in a forward supply of similar goods. Even if the initial intent for acquiring a demonstration vehicle is not a direct retail sale, it can be classified as a capital asset, allowing the dealer to claim full ITC.
This ITC, however, becomes unavailable if the dealer chooses the concessional rate scheme previously discussed.
Key Advance Rulings
Several advance rulings provide clarity on this matter:
- A.M. Motors (2018) 18 GSTL 93 (AAR, Kerala): This ruling affirmed that Input Tax Credit on a purchased demonstration car can be claimed and utilized to offset the output tax liability.
- M/s. Chowgule Industries Private Limited (GST AAR Goa-2019): This ruling stated that demonstration vehicles capitalized in accounting records, being capital goods used in the course or furtherance of business, qualify for ITC which can then be used to discharge output tax liability.