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GST Implications on Demo Car

Updated on :  

08 min read.

Car dealers usually purchase cars for resale. However, a few of those cars may also end up being used for demonstration purposes. This article will deal with the issue of GST on demo cars by discussing the following topics:

Taxability of demo cars under GST

To qualify as ‘supply’ under GST, an activity/transaction should satisfy the following conditions:

  • It should consist of goods or services or both
  • A person should make it
  • There should be an agreement involved
  • There should be consideration involved

From the above, it can be understood that when car dealers purchase cars meant for demonstration, such inward supply satisfies all the above conditions and thus is liable to GST. However, the mere act of allowing a customer to use a demo car cannot be treated as an outward supply since there is no consideration involved, and hence no GST will be applicable on the same. GST is applicable only when such demo cars are sold as second-hand goods.

Who is liable to pay GST on demo car?

Assuming that the demo car is sold as a second-hand car, the GST on such supply will be collected and paid to the government under forward charge by the car dealer (supplier).

What is the GST rate on demo car?

When a demo car is sold, the GST rates will be applied to the margin (sale price less purchase price) in this case. The following options are available to the car dealer:

Option 1 – Covered by the concessional rate scheme:

Notification No.-8/2018 Central Tax (Rate) dated 25-1-2018 details the scheme. The rates under this scheme are given below:

S. No.HSNDescription of goodsGST rate (CGST + SGST)
18703Old and used, petrol Liquefied petroleum gases (LPG) or compressed natural gas (CNG) driven motor vehicles of engine capacity of 1200 cc or more and the length of 4000 mm or more.18%
28703Old and used, diesel driven motor vehicles of engine capacity of 1500 cc or more and the length of 4000 mm18%
38703Old and used motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles.18%
487All old and used Vehicles other than those mentioned above12%

The above concessional rates will be applicable only if the following conditions are satisfied:

  • In case a registered person has claimed depreciation under Section 32 of the Income Tax Act, 1961 on the said goods, the margin will be selling price (consideration received) less depreciated value of goods as on date of supply. Negative margin shall be ignored (taken as zero).
  • In any other case, the margin will be the selling price and the purchase price. Negative margin shall be ignored.
  • No ITC or CENVAT credit should have been availed at the time of purchase.

Option 2 – Normal rate of GST:

The car dealer will be allowed to take ITC or CENVAT credit, whichever is applicable and charge GST on the outward supply at 28%. Compensation cess ranging from 1% to 22% will be charged as appropriate.

Availability of ITC on Demo Car to car dealers

The ITC on a motor vehicle with a seating capacity fewer than 13 persons would generally be ‘blocked credit’ under section 17(5) of the CGST Act. However, one of the exceptions to this rule is that the registered person makes a forward supply of the same type (car dealer). While the intention of purchasing a demo car might not be to make a retail sale. Hence, it can be treated as a capital asset, and the dealer may avail full ITC.

Such ITC will not be available if the dealer opts for the concessional rate scheme as mentioned earlier.

Popular Advance Rulings

  1. A.M. Motors (2018) 18 GSTL 93 (AAR, Kerala): ITC on demo car purchased can be availed and used to set off the output tax liability.
  2. M/s. Chowgule Industries Private Limited (GST AAR Goa-2019): Demo vehicles purchased were capitalised in the books of account. Capital goods which are used in the course or furtherance of business are entitled to ITC, which can be used to set off output tax liability.
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