Input Tax Credit on Demo Vehicles Allowed in the Dealer-Agency Model (2026): Circular No. 262/08/2026-GST
CA Meet Dhrangadhariya 
October 26, 2026
CA Meet Dhrangadhariya October 26, 2026
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Last updated: 26 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP
Quick summary
A dealer’s demo car – the one every showroom keeps for test drives – has had an inconsistent GST credit position depending on exactly how that dealer’s business is structured with the manufacturer. Circular No. 262/08/2026-GST, dated 26 October 2026, fixes that inconsistency by withdrawing a restrictive 2024 clarification.
New to terms such as “dealer-agency model” or “section 17(5)”? See the technical terms explained in simple words further down.
There are two common ways vehicle sales are structured:
Para 4.6 of the 2024 circular had held that in the dealer-agency model, since the dealer itself is not making the further supply of the vehicle on its own account, the demo vehicle could not be said to be used by the dealer for making a further supply – so credit on it was blocked under section 17(5)(a)(A) of the CGST Act, and unavailable to the dealer.
The circular finds no real practical difference between the two models that would justify different GST treatment:
Denying credit to one business model but not the other, the circular concludes, creates a discriminatory outcome with no underlying difference in substance.
Section 17(5)(a)(A) of the CGST Act excludes from the input-credit block any vehicle used for “further supply of such motor vehicles” – and the circular places weight on the word “such,” which it reads as covering vehicles used for furthering the supply of similar motor vehicles generally, not only the specific vehicle that is itself later resold. Since demo vehicles in both models support the sale of similar vehicles, the circular holds that credit should be available in both.
If credit on demo vehicles was earlier denied or reversed on the strength of the withdrawn para 4.6, this clarification may open the door to revisiting that position – please reach out to our team and we will be happy to assist with a review.
| Term | What it means |
|---|---|
| Dealer-agency model | An arrangement where the manufacturer sells vehicles directly to the customer, and the dealer only facilitates sales and keeps demo vehicles for test drives. |
| Traditional dealership model | An arrangement where the dealer itself buys and resells vehicles to customers, keeping some as demo vehicles. |
| Section 17(5)(a) | The CGST Act provision blocking input tax credit on certain motor vehicles, unless used for further supply, passenger transport, or driving training. |
| Written-down value | The reduced book value of an asset like a demo vehicle after accounting for its use and depreciation, at which it is typically sold. |
Circular No. 262/08/2026-GST withdraws para 4.6 of the earlier Circular No. 231/25/2024-GST, which had denied input tax credit on demo vehicles to an authorised dealer operating in the “dealer-agency model.” Credit on demo vehicles is now allowed in that model as well.
In the dealer-agency model, the vehicle manufacturer sells new vehicles directly to the customer, and the dealer only keeps demo vehicles to facilitate test drives, acting more like a marketing agent. In the traditional model, the dealer buys a fleet from the manufacturer and resells vehicles to customers on its own account, designating some as demo vehicles.
Because the dealer in that model was not itself making a further supply of the vehicle to the customer – the manufacturer sold directly – so the demo vehicle could not be said to be used by the dealer for “further supply of such motor vehicles” under section 17(5)(a)(A), the exception that allows credit.
The circular finds no practical difference between the two models: in both, the demo vehicle is purchased from the manufacturer against a tax invoice, held for a mandatory period, treated as a capital asset, and eventually sold at a written-down value with tax paid at that time. It also reads the phrase “such motor vehicles” in section 17(5)(a)(A) as covering vehicles used to promote the sale of similar vehicles generally, not only the identical vehicle resold.
No. The restriction under section 17(5)(a) on vehicles with a seating capacity of up to 13 persons, and its three exceptions – further supply, passenger transport, and driving training – remain unchanged. The circular only clarifies that a demo vehicle in the dealer-agency model qualifies under the “further supply of such motor vehicles” exception, just as it already did in the traditional dealership model.
This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.
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