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Landmark Ruling: GST Authority Grants Tax Credit For Demo Cars To Dealers
In a pivotal decision by the West Bengal bench of the GST Authority for Advance Ruling (AAR), registered automobile dealers have been granted the ability to claim input tax credit (ITC) on cars used for demonstration purposes, better known as demo cars.
This judgment stems from an application made by Landmark Cars East Pvt Ltd, an authorized agent for Mercedes Benz, seeking clarity on the tax implications of demo cars in the country.
The AAR clarified, "The applicant is entitled to claim input tax credit charged and paid on inward supply of car which are used for demonstration purpose and supplied further after a specified time period."
This ruling directly responds to the query regarding the entitlement of ITC charged and paid on cars procured from Mercedes Benz India for demonstration to potential customers.
Regarding the tax rate applicable upon the sale of a demo car, the AAR stated that "its outward supply would attract the same rate of tax as its inward supply." Cars are currently subject to a 28% GST, in addition to applicable cess, upon sale.
Furthermore, the AAR touched on the tax implications of reimbursement received by the dealer from the manufacturer for losses incurred on the sale of demo cars. It was determined that such reimbursement would attract an 18% GST rate, being considered as consideration received against the supply of services for "agreeing to tolerate an act."
Rajat Mohan, Executive Director at Moore Singhi, highlighted the significance of this ruling for automobile dealers across India. He pointed out that it addresses a crucial concern regarding the costs incurred from maintaining demonstration vehicles in showrooms.
However, Mohan also expressed reservations about the decision to tax the reimbursement for "Loss on Sale of Demo Car" at 18%, suggesting that this interpretation might be contested in future forums.
He reasoned that the 'loss on sale of demo car' might not necessarily qualify as a "supply" under GST regulations, potentially complicating tax strategies for other automobile companies with showroom operations.
DriveSpark Thinks
This ruling, first published on 07 May 2024, marks a notable moment for the automobile dealership sector in the country, potentially influencing operational and tax planning strategies moving forward.
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