Published 28 October 2026
A car dealer buys cars to use as demo vehicles for test drives. Whether the dealer can claim GST credit on them depends on section 17(5)(a), which blocks credit on motor vehicles for carrying not more than thirteen persons, except where they are used for further supply of such vehicles, for transporting passengers or for driving training. On 26 October 2026 the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 262/08/2026-GST, which changes the position for one type of dealer.
What the earlier circular said
Circular No. 231/25/2024-GST (10 September 2024) dealt with demo vehicles. In para 4.6 it said that where a dealer works only as an agent or service provider of the manufacturer (the “dealer-agency model”), the dealer is not selling vehicles on its own account. It was merely providing marketing or facilitation services. The demo vehicle, it said, could not be used for further supply of vehicles by the dealer, so credit stayed blocked by section 17(5)(a)(A).
The two business models
The circular describes both.
- Traditional dealership. The dealer buys a stock of vehicles, sells them on its own account, and uses some as demo vehicles.
- Dealer-agency. The manufacturer sells directly to the customer. The dealer buys only the vehicles needed for demonstration and test drives.
Why the Board changed its view
The circular gives these reasons:
- In both models, the demo vehicle serves the same purpose: to let the customer drive before buying.
- In both models, dealers buy the vehicles from the manufacturer on tax invoices, treat them as capital assets, hold them for a mandatory period, and then usually sell them at the written down value, paying tax at that point. The Central Motor Vehicle Rules treat them alike.
- Denying credit to one model but not the other therefore creates a discriminatory effect.
- Section 17(5)(a)(A) refers to the “further supply of such motor vehicles”, not “the said motor vehicle”. So credit is allowed on a vehicle used for the further supply of similar vehicles, and not only the very vehicle sold.
The result
The clarification in para 4.6 of Circular 231/25/2024-GST is withdrawn. Credit on demo vehicles is not blocked under section 17(5)(a) for a dealer in the dealer-agency model.
What dealers should note
- This is a clarification about section 17(5)(a). Credit must still meet the other conditions of sections 16 and 17.
- A dealer which held back credit on demo vehicles because of para 4.6 should review those purchases with its adviser. The circular does not say how past periods are to be handled, and it does not mention any time limit to claim credit, so section 16(4) continues to apply.
- Tax is still payable when the demo vehicle is later sold.