GST On Demo Products Used By A Merchant

Goods & Service Tax is levied on the supply of goods and services and as per the provisions of section 2(83) of the CGST Act, outward supply in relation to a taxable person means the supply of goods & services or both whether by sales, barter, exchange, license, rental, lease, disposal or other any mode being made or agreed to be made by such person in the course of the furtherance of the business.

The provisions of section 7(1) of the CGST Act, provide that supply includes all the forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, disposal made, or agreed to be made for a consideration by a person in the course of the furtherance of the business.

IMPLICATION OF GST ON DEMO CARS USED:

In the automobile industry, a demonstration vehicle is a vehicle that is used by every dealer. These vehicles are well-maintained and are usually used for the purpose of the demonstrations to the prospective customers in order to promote the sales. Using a demo vehicle is a business requirement for every dealer in the present times, as the test drive and various other illustrations help the prospective customer reach the right decision.

And after a specific period of time, these demo vehicles are generally sold off as second-hand goods.

 Provided that, the demo vehicle can either be a ‘capital good’ or an ‘input good’. 

As per the provisions of section 2(19) of the CGST Act, 2017 “capital goods” means goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business, and

As per section 2 (59) of the CGST Act, 2017 “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

INPUT TAX CREDIT ON DEMO PRODUCTS:

As per the provisions of the CGST Act, every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business.

Provided that, the section 17(5) of the Act states that ITC will not be available in respect of motor vehicles and other conveyances,  except when such motor vehicles or other conveyances are supplied further, or used for transportation of passengers or giving training on driving, flying, navigating such vehicles or conveyances or are used for transportation of goods.

ITC on the demo cars can be availed as per the provisions of the CGST Act as the demo vehicles like a demo car is used for the furtherance of supply of such sort of vehicles, also the demo cars are used for imparting training about the driving and various features and functions available in the car, hence input tax credit can be claimed on such demo vehicles as well.

 Provided that, in order to provide a more clear view on this topic, various Advance Rulings have been passed which stand by the view that demo cars being capital goods are eligible for claiming ITC:

In the case of the Chowgule Industries, the Advance Ruling Authority of Goa held that the capital goods which are used in the furtherance of the business are entitled to input tax credit provided that ITC on the motor vehicle purchased as the demonstration product can be availed as the input tax credit on the capital goods and can be set off against the output tax payable under the GST.

Henceforth, the purchase of the demo cars can be treated as the capital goods which are used in the furtherance of the business and are therefore entitled to the input tax credit as well.

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