Updated Headline: Dealers Can Claim Input Tax Credit (ITC) on Demo Cars, Rules Karnataka AAR

This ruling could potentially pose challenges for other automobile companies operating showrooms, prompting them to review their tax strategies, Mohan said.

Registered automobile dealers can claim input tax credit (ITC) on cars that are used for demonstration to potential customers, commonly known as demo cars, the West Bengal bench of the GST Authority for Advance Ruling (AAR) has ruled.

Landmark Cars East Pvt Ltd, an authorised agent of Mercedes Benz, had filed an application before the bench seeking a ruling on various taxation aspect of demo car.

''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,'' the AAR said.

This ruling was in response to a question on whether the applicant is entitled to claim ITC charged and paid on inward supply of car from Mercedes Benz India that are used for demonstration purpose to the potential customer interested in buying Mercedes Benz Car.

To a question on what would be the tax rate on sale of demo car, the AAR said ''its outward supply would attract same rate of tax of its inward supply''. A 28 per cent GST, plus applicable cess, is levied on sale of cars.

On what would be the tax implication on reimbursement received by the dealer from the manufacturer on loss suffered on sale of demo car, the AAR said the reimbursement amount would attract 18 per cent GST. ''The amount received by the applicant from Mercedes Benz India towards reimbursement of ''loss on sale of demo car'' shall be regarded as consideration received against supply of services of 'agreeing to tolerate an act' and would be taxable @ 18 per cent,'' the AAR said.

Moore Singhi Executive Director Rajat Mohan said the ruling by the West Bengal AAR allowing the authorised dealer of Mercedes Benz India to claim ITC on the inward supply of demonstration cars is a significant development for automobile dealers nationwide.

''It addresses a major concern regarding the costs associated with managing showroom operations, particularly concerning the expenses related to demonstration vehicles,'' Mohan said.

However, the AAR's decision to classify the reimbursement received by the dealer from Mercedes Benz India for the ''Loss on Sale of Demo Car'' as taxable under GST at 18 per cent may not be much acceptable to the sector, he said.

''We believe this interpretation could be challenged in subsequent forums, as the 'loss on sale of demo car' may not necessarily qualify as a ''supply'' under GST regulations. This ruling could potentially pose challenges for other automobile companies operating showrooms, prompting them to review their tax strategies,'' Mohan said.

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