Chandrasekhar Kutty, Founding Partner, Sashthi Taxlegal Advisory Services LLP | GST Litigation • Advisory • Appellate Representation | Hosur • Bengaluru
27 October 2026
Para 4.6 of Circular 231/25/2024-GST dated 10.09.2024 stands withdrawn. CBIC now clarifies that input tax credit on demo vehicles is not blocked under section 17(5)(a) of the CGST Act for a dealer operating under the dealer-agency model, where the OEM sells directly to the customer and the dealer only provides marketing and test-drive facilitation.
The earlier position
Circular 231 allowed ITC on demo vehicles to traditional dealers who buy and sell vehicles on their own account, but denied it to agency-model dealers on the reasoning that they do not make a “further supply of such motor vehicles” and merely provide marketing or facilitation services to the manufacturer.
The Board’s reasoning now
- In both models the demo vehicle serves the same purpose: letting the customer drive the car before buying.
- In both models the dealer buys the demo vehicle on a tax invoice, capitalises it, holds it for a mandatory period and later sells it at written-down value, paying tax at that point.
- Section 17(5)(a)(A) uses the words “such motor vehicles”, not “the said motor vehicle”. Credit is therefore available for vehicles used in furthering the supply of similar vehicles, not only the specific vehicle sold.
- Denying credit to one model and not the other produces a discriminatory result for vehicles treated alike under the Central Motor Vehicle Rules, 1989.
Action for dealers
Agency-model dealers (a model now common with several OEMs, including electric vehicle makers) who reversed ITC or did not claim it in reliance on para 4.6 should examine whether a claim is still open under section 16(4), and whether any demand issued on this ground can be contested. The “such motor vehicles” reading is also a useful interpretive tool in other section 17(5)(a) disputes.
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Source: CBIC Circular No. 262/08/2026-GST dated 26.10.2026, F. No. CBIC-20001/2/2026-GST. This article is for general information and does not constitute professional advice. Readers should obtain specific advice before acting on any matter discussed here.