A car dealer generally displays one variant of every car model that is in his/her dealership as a demo car. When this is the case, the car dealers will have to carefully categorise the cars as stock or capital goods depending on the situation. The exact use of the car in the business will be the deciding factor here. In this article, we will illustrate the components of GST on Demo cars.
When Is GST Applicable On Demo Cars And What Is The Rate Of GST?
Generally, car dealers purchase cars directly from Manufacturers and then supply them to end-users. The Car Dealer may use a few cars as demo cars. These demo cars will be treated as an inward supply when received by the Car Dealer. After that, the dealer may capitalise the demo car (in the books of accounts) as it will be used for the furtherance of business. When the car is ultimately sold, it will end up as a second-hand sale or sale of a used car, rather than a sale of a brand-new car (compared to the other cars in stock-in-trade). The car dealer has two options for charging GST at the time of sale:
- Charge 18% GST on the margin, i.e., Sale price less purchase price, if:
- It is a used car with petrol, LPG or CNG engine with a capacity above 1200cc and a length greater than 4,000mm.
- It is a used car with a diesel engine with a capacity above 1500cc and a length greater than 4,000mm.
- It is a used car with an engine capacity above 1500cc.
- Charge 12% GST on a used car in any other case.
The car dealer can charge the above rates only after considering the below-mentioned points:
- If depreciation is claimed as per the provisions of the Income Tax Act, 1961, the margin is the sale price less written-down-value as on the date of sale. In case there is a negative margin (loss), it should be taken as zero, and GST is not applicable.
- In other cases, the margin is the sale price less purchase price. The negative margin is ignored.
- ITC should not have been claimed at the time of purchase.
The taxpayer/car dealer can charge GST at 28% (in line with other cars supplied) plus the compensation cess that ranges between 1% and 22% depending on the type of car. However, in this option, the taxpayer/car dealer can claim ITC.
Input Tax Credit (ITC) On Demo Cars
ITC on Motor vehicles with a seating capacity of up to thirteen passengers is generally blocked for taxpayers. The exceptions are when the motor vehicles are used for:
- Transportation of goods
- Further supply
- Transportation of passengers
- Imparting training for driving, flying, navigating such vehicles and so on.
For further details on blocked credit, please refer to our article on Blocked Credit here
The points to be noted here are:
- In case the car dealer treats the Demo Car as a further supply, then ITC can be claimed normally (in the normal course of business).
- If the Demo Car is treated as a capital asset, then the ITC can be claimed as if it is used in furtherance of the business.
- In all other cases, the ITC will be blocked, and the taxpayer can opt for one of the two options mentioned above for charging GST at the time of sale. However, only under Option B, the taxpayer can claim ITC.