Implications of GST on Supply of Demo Cars

  • Blog|GST & Customs|
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  • By Taxmann
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  • Last Updated on 31 May, 2021

Introduction to Implications of GST on supply of Demo Cars

Demo cars are used by car dealerships to show the capability of the vehicle with the aim of promoting sales. Customers test-drive demo models to experience the performance and understand the features of the vehicle. These cars are used for demonstration purposes only for a limited time period and are sold after that.

Taxability and Rate of Tax

The car dealer must have taken registration of demo cars in his name being used by him for trail run of its customer which are later on transferred to its customers. So by virtue of registration, the dealer becomes the first owner of such cars. Now, the car dealer may sell demo cars and at the time of sale to the customer, the vehicle registration gets transferred to the customer. The transfer of a demo car to the customer by a car dealer is a supply under GST and shall be taxable at the rate specified for the cars. However, the Government has prescribed separate provisions for persons dealing in buying and selling of secondhand goods. Since, before transfer by dealer, the demo cars were used before by dealers, the provisions of old and used vehicle may get attracted.

The dealer shall have the following two options-

  • Option-1 The dealer can apply the concessional rate of tax as prescribed in the Notification No.-8/2018 Central Tax (Rate) dated 25-1-2018 only if no ITC has been claimed by him under GST Law or erstwhile laws. The concessional rates of GST are 18% for old and used large vehicles (in case of Petrol LPG/CNG driven motor vehicles having engine capacity1200cc or more & in other motor vehicles where engine capacity is 1500cc or more) and 12% for other old and used vehicles. The government has also exempted the compensation cess on all old and used motor vehicles vide Notification No.1/2018-Compensation Cess (Rate), dated 25-1-2018.
  • Option-2 If the dealer cannot apply the concessional rate of tax as per the above notification, then he shall be allowed to take the ITC on the purchase of demo cars and normal GST rate of 28% and compensation cess ranging from 1% to 22% as the case may be will be applicable.

Availability of Input Tax Credit

The dealer at the time of registration and purchase would have booked the vehicle as fixed asset in its books of accounts irrespective of the fact that whether ITC of the same has been claimed or not. Usually, demo cars are purchased against tax invoice by the dealers which are capitalised in their books of account, as capital goods and reflected under Fixed Assets of the Company excluding GST component.

According to the provisions of input tax credit provided under Section 17(5) of the CGST Act, ITC on motor vehicles for transportation of persons is available when such vehicles are used for further supply of such motor vehicles or imparting training on driving of such motor vehicles. Moreover, the Authority for Advance Rulings, Kerala in case of A.M. Motors., In re [2018] 98 taxmann.com 157 (AAR -KERALA) held that input tax paid by a vehicle dealer on purchase of motor car used for demonstration purpose of customer can be availed as input tax credit on capital goods and set off against output tax payable under GST. Therefore, demo cars are capital goods being used in the course or furtherance of business are entitled for Input Tax Credit.

Valuation Under GST

As per valuation rules, the special method is prescribed for cases where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods. In such cases, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.

But it is noteworthy that if ITC is taken, then above mentioned option-1 of concessional rate is not available and the car dealer shall pay an amount equal to the input tax credit taken on the demo cars reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods determined as value of taxable supply, whichever is higher.

Also Read: GST e-Invoicing – Concept, Process & Guidance

Conclusion

It depends upon the dealer whether he wants to apply concessional GST rate on sale of demo cars for which he could not avail ITC and need to fulfil other prescribed conditions. Otherwise, he can avail ITC and utilize the same on payment of output tax liability during the sale of demo cars.  

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

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