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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:
To qualify as ‘supply’ under GST, an activity/transaction should satisfy the following conditions:
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.
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).
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.||HSN||Description of goods||GST rate (CGST + SGST)|
|1||8703||Old 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%|
|2||8703||Old and used, diesel driven motor vehicles of engine capacity of 1500 cc or more and the length of 4000 mm||18%|
|3||8703||Old and used motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles.||18%|
|4||87||All old and used Vehicles other than those mentioned above||12%|
The above concessional rates will be applicable only if the following conditions are satisfied:
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.
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.