Circular No. 262/08/2026-GST: ITC on Demo Vehicles Allowed in Dealer-Agency Model

The CBIC has issued Circular No. 262/08/2026-GST dated 26.10.2026 under Section 168(1) of the CGST Act. It withdraws para 4.6 of Circular No. 231/25/2024-GST (10.09.2024), which had blocked input tax credit (ITC) on demo vehicles for dealers working under the dealer-agency model. ITC on demo vehicles is now not blocked under Section 17(5)(a) for such dealers either.

The Background

Section 17(5)(a) blocks ITC on motor vehicles for transporting persons with an approved seating capacity of up to 13 (including the driver). It allows ITC only where the vehicle is used for (A) further supply of such motor vehicles, (B) transportation of passengers, or (C) training on driving such vehicles.

Circular 231/25/2024-GST had allowed ITC on demo vehicles to traditional dealers. But its para 4.6 said that a dealer who only acts as an agent or service provider of the manufacturer does not sell vehicles on its own account, so ITC on its demo vehicles stayed blocked. This para has now been withdrawn.

Two Business Models

Why the Board Changed Its View

• Same purpose: in both models the demo vehicle lets the customer test-drive before buying, so it helps sell similar vehicles.
• Same treatment: in both models the dealer buys the demo vehicle from the OEM against a tax invoice, shows it as a capital asset, keeps it for the required period, and then sells it at written down value, paying tax at that time. The Central Motor Vehicles Rules, 1989 also treat them alike.
• “Such motor vehicles”: Section 17(5)(a)(A) uses the words “further supply of such motor vehicles”, not “the said motor vehicle”. So ITC is allowed on vehicles used to further the supply of similar vehicles, not only on the exact vehicle sold.
• No discrimination: denying ITC to one model only had a discriminatory effect.

What Dealers Should Do Now

• Claim within time: ITC is subject to the time limit in Section 16(4): 30 November after the end of the financial year, or the date of filing the annual return, whichever is earlier. For demo vehicles bought in FY 2025-26, check whether ITC was left unclaimed and claim it before 30 November 2026, if the annual return has not been filed earlier.
• Pending notices and appeals: where ITC on demo vehicles has been denied, or a show cause notice relies on para 4.6 of Circular 231, cite Circular 262/08/2026-GST in the reply or appeal, as that para now stands withdrawn.
• Keep records: OEM tax invoice, entry as a capital asset, and the demo-vehicle register or OEM requirement for test drives.
• When the demo vehicle is sold: it is a sale of capital goods on which ITC was taken. Under Section 18(6), pay the higher of (a) the ITC taken, reduced by 5% for every quarter or part of a quarter of use, and (b) tax on the transaction value.

Example (illustrative)

A dealer working under the agency model buys a demo car from the OEM for ₹10,00,000 + GST of ₹1,80,000. Earlier, the ₹1,80,000 was treated as blocked. Under Circular 262/08/2026-GST it can be claimed as ITC, subject to Section 16 conditions and time limits. After 6 quarters, the car is sold for ₹6,00,000. ITC after reduction = ₹1,80,000 − 30% (6 quarters × 5%) = ₹1,26,000. Tax on the sale at 18% = ₹1,08,000. The higher amount, ₹1,26,000, is payable.

Related

• GST Margin Scheme for Second-Hand Car Dealers: ITC on Repairs and Spare Parts
• GST Notice Reply Draft Generator

Reference: Circular No. 262/08/2026-GST dated 26.10.2026; Circular No. 231/25/2024-GST dated 10.09.2024 (para 4.6 withdrawn); Sections 16(4), 17(5)(a) and 18(6), CGST Act, 2017. The example uses an assumed 18% rate and is for illustration only. This page is for general information only.