Telangana AAR: No GST Credit Available on Test Drive Vehicles When Included as Replacement Vehicles

The Authority of Advance Ruling (AAR), the Telangana branch has ruled that there will not be any ITC available on test-drive vehicles when kept in a workshop as a replacement vehicle.

The two-member bench comprising S.V. Kasi Visweswara Rao and Sahil Inamdar has noted that the applicability of Input Tax Credit (ITC) relies on the future event, i.e., whether the dealer keeps the vehicle in the workshop as a replacement vehicle or sells vehicles. In case the vehicle is further supplied, then ITC can be claimed.

The applicant is engaged in the business of automobiles and supplies vehicles and has the dealership of MSIL, Bajaj, KTM, and Chetak Technology Limited. The applicant also provides servicing, repairing, and related auxiliary services concerning motor vehicles. It also sells pre-owned cars.

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To run the business, selling vehicles, the applicant needs to show a demonstration of a vehicle to the customers. The vehicle model used for demo purposes is registered, unlike normal vehicles. Moreover, the model of the car in question is used for demonstration for a period of two years or 40,000 KM, whichever is earlier. The vehicles are utilized for providing test drives to visitors who come to the showroom to purchase a vehicle. The dealers show them to learn more about vehicle testing on their own.

Usually, because of the changing demands of the customers and to fulfilling their requirements, this is a mandatory part of their selling procedure. So doing this makes it easy for customers to make a decision. It is also a significant procedure to make a sale.

The applicant asked for an early ruling on the matter of whether the applicant is subject to receive the ITC charged on the inward supply of motor vehicles that are used for demonstration at the time of business of supply of motor vehicles as an input tax credit on capital goods.

As per the observation of the AAR, it states that if a motor vehicle purchase is capitalized, it does not render the tax paid on the purchase ineligible for Input Tax Credit (ITC) if there is a subsequent supply of such vehicles as per Section 7 of the CGST Act, 2017. For instance, suppliers who provide cars for lease or rent must capitalize them in their books to make such supplies.

According to the AAR, the eligibility of the applicant for ITC depends on a future event. If they retain the vehicle in their workshop as a replacement vehicle or sell such vehicles, they are entitled to claim ITC.

The AAR further ruled that if the applicant follows the sales policy of MSIL and retains the vehicle for their workshop as a replacement vehicle, they are not eligible for GST ITC as there is no further supply involved. Consequently, the ITC claimed by the applicant must be repaid in cash.