Authorised motor vehicle dealers who work under a dealer-agency model, where the manufacturer sells new vehicles directly to customers, were earlier told by CBIC that input tax credit (ITC) on their demo vehicles was blocked. That clarification has now been withdrawn. This article explains what has changed, what has not, and what dealers and their advisors should check now.

The change is made by CBIC Circular No. 262/08/2026-GST dated 26 October 2026, issued under section 168(1) of the CGST Act, 2017. It withdraws Paragraph 4.6 of Circular No. 231/25/2024-GST dated 10 September 2024 and clarifies that ITC on demo vehicles is not blocked under section 17(5)(a) for a dealer in the dealer-agency model (Para 7).

1. The legal provision involved

Section 17(5)(a) of the CGST Act blocks ITC on motor vehicles for transportation of persons having an approved seating capacity of not more than thirteen persons (including the driver). The block does not apply when such vehicles are used for making the following taxable supplies:

• (A) further supply of such motor vehicles;
• (B) transportation of passengers; or
• (C) imparting training on driving such motor vehicles.

Demo vehicles are not used for transporting passengers or for driving training. So the question has always been whether they fall within exception (A), "further supply of such motor vehicles". The provision applies only to vehicles with a seating capacity of up to 13 persons, including the driver. The Circulars discussed here deal with that category.

2. What Circular 231/25/2024-GST said in 2024

Circular No. 231/25/2024-GST dated 10 September 2024 dealt with demo vehicles on the following points:

As a result of Para 4.6, two dealers using identical demo vehicles for identical test drives received different ITC treatment, depending only on who invoiced the customer for the new vehicle.

3. The two sales models, as described by CBIC

Source: Circular No. 262/08/2026-GST, Paras 5 and 5.1.

4. What Circular 262/08/2026-GST clarifies

CBIC examined both models and observed in Para 5.1 that, in both:

• the demo vehicle serves the same purpose of giving the customer a driving experience before buying;
• the dealer buys the demo vehicle from the manufacturer against a tax invoice;
• the vehicle is typically shown as a capital asset in the dealer's books;
• it is held as a demo vehicle for a mandatory period and is then generally sold at written down value, with applicable tax paid at that time; and
• such vehicles are treated at par under the Central Motor Vehicle Rules, 1989.

CBIC concluded that there is no practical difference in the treatment of these vehicles, and that denying ITC to one business model has a discriminatory effect. In Para 6, it relied on the words "such motor vehicles" in section 17(5)(a)(A) to hold that demo vehicles in both models serve the purpose of furthering the supply of similar vehicles.

5. What the Circular does not say

Circular 262 is addressed to Central Tax field formations. Where a dealer is administered by the State GST department, check whether the State has issued a corresponding circular or trade notice, and cite it along with the CBIC Circular.

6. A simple illustration

Two authorised car dealerships buy the same model of demo vehicle from the same manufacturer, against tax invoices, and use it only for customer test drives:

• Dealership A buys new cars from the manufacturer and sells them to customers itself (traditional model).
• Dealership B provides marketing and test-drive facilities while the manufacturer invoices customers directly (dealer-agency model).

Under Para 4.6 of Circular 231, Dealership B's ITC on the demo vehicle was treated as blocked. After Circular 262, the dealer-agency model is no longer a ground for blocking that ITC under section 17(5)(a). Both dealerships must still meet every other condition, such as a valid invoice, the credit appearing in GSTR-2B, receipt of the vehicle, actual demo use, the section 16(3) depreciation condition and the section 16(4) time limit. This is a hypothetical illustration and not an assessment of any particular dealer.

7. Capitalisation, depreciation and later sale

These points come from Paras 5.4 and 5.5 of Circular 231, which have not been withdrawn:

• Capitalisation: Showing the demo vehicle as a capital asset does not by itself affect ITC, subject to the other provisions of the Act.
• Depreciation (section 16(3)): If depreciation under the Income-tax Act is claimed on the GST component of the vehicle's cost, ITC on that tax component is not allowed. The fixed asset register and the tax depreciation working must be consistent with the ITC claim.
• Sale of the demo vehicle (section 18(6) read with rule 44(6)): When a capitalised demo vehicle on which ITC was taken is sold, the dealer must pay an amount or tax as worked out under these provisions. Keep the purchase ITC and the sale working linked in your records.

Also check how the ITC decision affects the tax treatment on the later sale of the demo vehicle. Options available for supply of old and used vehicles, such as valuation on margin, carry their own conditions, including conditions related to ITC. Examine these before deciding the treatment of each vehicle.

8. Can dealers claim ITC for past periods?

There is no automatic right to claim past ITC. The Circular withdraws a restrictive clarification, but it does not change the time limits in the Act.

Under section 16(4), ITC on an invoice cannot be taken after 30 November following the end of the financial year to which the invoice relates, or after the date of filing the annual return for that year, whichever is earlier. In practical terms:

Where ITC was taken and later reversed because of Para 4.6, whether and how it can be re-claimed depends on the reason for reversal, the period, the manner of reporting in GSTR-3B and the applicable time limits. This should be examined case by case.

9. Action points for automobile dealers

1. 1Review FY 2025-26 demo vehicle invoices before 30 November 2026.Urgent
   List every demo vehicle bought in FY 2025-26 on which ITC was not taken. Confirm eligibility with your GST advisor and decide before the time limit. Check that the FY 2025-26 annual return is not filed before this decision, as filing it ends the window.
2. 2Confirm your actual sales model.This week
   Read the dealership or agency agreement with the manufacturer. Receiving incentives or commission from the OEM does not by itself mean you follow the dealer-agency model. Who invoices the customer for the new vehicle is the key fact.
3. 3Keep a demo vehicle register.This week
   For each demo vehicle, record the registration number, purchase invoice, date of designation as demo, test-drive logs and date of sale. This is your main evidence of actual demo use.
4. 4Separate demo vehicles from staff and management cars.This week
   Para 4.5 of Circular 231 still applies. ITC on vehicles used for staff or management transport remains blocked. Do not mix the two categories in the asset register.
5. 5Check depreciation on the GST component.Ongoing
   If ITC is taken, the GST component must not be part of the cost on which income-tax depreciation is claimed (section 16(3)). Align the fixed asset register and the tax audit working.
6. 6Plan the tax on sale of each demo vehicle.Ongoing
   Before selling a demo vehicle on which ITC was taken, compute the amount payable under section 18(6) read with rule 44(6), and check its effect on any used-vehicle valuation option.
7. 7Reconcile GSTR-2B, purchase ledger and GSTR-3B.Ongoing
   Every demo vehicle invoice should be traceable from the supplier's invoice to the credit shown in your return.
8. 8Name one responsible person.Ongoing
   One person in finance should own the demo vehicle file and close open items with the GST advisor.

10. Action points for GST professionals

1. 1Use Circular 262 in pending matters based on Para 4.6.
   Where a notice, audit observation, order or appeal denies demo vehicle ITC only on the dealer-agency ground, cite Paras 5, 5.1, 6 and 7 of Circular 262 and the withdrawal of Para 4.6. Note that the Circular does not itself prescribe how pending proceedings are to be closed.
2. 2Check whether the matter is with Central or State GST.
   Circular 262 is addressed to Central Tax formations. For State-administered dealers, look for the State circular or trade notice.
3. 3Do not stretch the Circular.
   It removes the dealer-agency ground only. If the department disputes actual demo use, seating capacity, depreciation or time limit, the reply needs evidence on those points.
4. 4Advise on the section 16(4) window before 30 November 2026.
   For clients who did not take ITC on FY 2025-26 demo vehicle invoices, advise in time, and check the planned filing date of the FY 2025-26 annual return.
5. 5Do not promise recovery of older credits.
   For FY 2024-25 and earlier invoices, the section 16(4) time limit has passed. Treat any claim for those years as a legal question, not a routine re-credit.
6. 6Review ITC reversed earlier.
   Where a client reversed demo vehicle ITC because of Para 4.6, examine the period, the reason recorded, the GSTR-3B reporting and the applicable time limits before advising re-claim.
7. 7Link purchase ITC with sale-side tax.
   Check the section 18(6) and rule 44(6) working and the conditions of any used-vehicle valuation option, so that the client does not gain on one side and lose on the other.
8. 8Document the review.
   Record the sample, the evidence examined and the conclusion for each vehicle. A documented position is easier to defend.

11. Five-minute self-check

Ask your finance or GST manager to answer YES, NO or NOT SURE:

A NO or NOT SURE does not by itself mean the GST treatment is wrong. It marks an item for verification.

12. Documents to keep ready

• Manufacturer-dealer agreement: showing who sells the new vehicle to the customer and the dealer's role.
• Demo vehicle purchase invoices: from the manufacturer, with the matching GSTR-2B entries.
• Demo vehicle register and test-drive logs: evidence of actual demo use.
• Fixed asset register: capitalisation details and the depreciation working, showing whether the GST component is included.
• ITC records: purchase ledger, GSTR-2B and GSTR-3B for the relevant periods.
• Sale records: sale invoices of demo vehicles and the section 18(6) / rule 44(6) working.
• Past ITC working: any credit not taken or reversed because of Para 4.6, with dates and reasons.
• Notices and orders: any departmental communication on demo vehicle ITC.

13. What if you find a difference?

14. Official sources

1. CBIC Circular No. 262/08/2026-GST dated 26 October 2026 (F. No. CBIC-20001/2/2026-GST), GST Policy Wing, Paragraphs 3 to 7.
2. CBIC Circular No. 231/25/2024-GST dated 10 September 2024 (F. No. CBIC-20001/6/2024-GST), Paragraphs 4.1 to 4.6 and 5.1 to 5.5. Para 4.6 now stands withdrawn.
3. CGST Act, 2017: section 16 (eligibility, including sub-sections (3) and (4)), section 17(5)(a) (blocked credit on specified motor vehicles), section 18(6) (supply of capital goods on which ITC was taken) and section 168(1) (power to issue clarifications).
4. CGST Rules, 2017: rule 44(6).

Both Circulars are available on the CBIC portals, cbic-gst.gov.in and taxinformation.cbic.gov.in (Circulars section).

Scope of this article: the analysis is based on the text of the two Circulars and the provisions cited. No individual dealer's agreements, vehicle records or ITC claims have been examined.

GST DOST | GST Advisory, ITC Reconciliation and Professional Support