ITC on Demo Cars: Kerala AAR Ruling and Related Perspectives
The Kerala Advance Authority of Ruling (AAR) clarified the eligibility of Input Tax Credit (ITC) for motor vehicles used as demonstration cars. In the Sai Service Pvt. Ltd. case [Advance Ruling No. KER/09/2024, January 10, 2024], the AAR confirmed that demo cars qualify for ITC under specific conditions, benefiting motor dealerships.
Key Points of the Ruling
Facts of the Case
- Applicant: Sai Service Pvt. Ltd., a supplier of motor vehicles.
- Purpose of Demo Cars: Dealerships use demo cars for customer test drives.
- Query Raised: Sai Service asked whether ITC applies to motor vehicles used for demonstration purposes.
Ruling Highlights
- Demo Cars as Business Tools
- Dealerships use demo cars to boost sales and assist customers in making informed decisions.
- These vehicles meet the conditions under Section 16(1) of the CGST Act, as they serve business purposes.
- Exceptions under Section 17(5)
- Section 17(5) restricts ITC for motor vehicles, but exceptions apply to vehicles sold after demo use.
- Demo cars qualify if dealerships sell them later as second-hand vehicles.
- Eligibility Conditions
- ITC applies only when dealerships sell demo cars or use them for further supply after demonstration purposes.
Related Rulings and Industry Implications
Supportive Rulings
- Madhya Pradesh AAR (2020)
- Businesses using vehicles for test drives and selling them afterward qualify for ITC.
- Authorities considered these vehicles as resold items, not restricted under Section 17(5).
- Haryana AAR & AAAR (2021)
- Dealers who use demo cars and later resell them can claim ITC.
- Chowgule Industries Pvt. Ltd. (2019)
- Courts ruled that demo vehicles sold later qualify as further supply, ensuring ITC eligibility.
Industry Impact
- Lower Sales Promotion Costs
- ITC eligibility for demo cars reduces the financial burden on dealerships, enabling more cost-efficient sales strategies.
- Need for Uniformity
- Conflicting rulings across states create confusion. Experts urge for standardized GST guidelines to improve compliance.
Conclusion
The Kerala AAR’s ruling provides clarity by affirming ITC eligibility for demo cars sold as second-hand vehicles. This decision offers relief to dealerships and underscores the need for consistent GST provisions. Clearer guidelines will simplify compliance and align GST with its goal of being a “Good and Simple Tax.”
