What CBIC has clarified
Car dealers who sell under the manufacturer-agency model no longer lose input tax credit on their demo vehicles. Circular No. 262/08/2026-GST, dated 26 October 2026, issued by the Central Board of Indirect Taxes and Customs (CBIC) under Section 168(1) of the Central Goods and Services Tax Act, 2017 (CGST Act), withdraws paragraph 4.6 of Circular No. 231/25/2024-GST dated 10 September 2024 and clarifies that input tax credit (ITC) on demo vehicles is not blocked under Section 17(5)(a) for a dealer in the dealer-agency model. The circular is signed by Gaurav Singh, Commissioner (GST).
In plain business language: a demo car exists to be driven by prospective buyers, not to be kept by the dealer. Whether the dealer buys cars to sell on its own account or acts as the manufacturer's agent makes no difference to what the demo car does — yet the two models were being treated differently for ITC. Circular 262 ends that difference for the agency model, and it does so by withdrawing the very paragraph that stood in the way, rather than by creating a new exemption.
💡 In one line: paragraph 4.6 of Circular 231 is withdrawn — ITC on demo vehicles is not blocked under Section 17(5)(a) for dealers who sell motor vehicles as authorised agents of the manufacturer.
At a glance
1. The two dealership models — and why they were treated differently
Circular 231, issued in September 2024, dealt with ITC admissibility for authorised agents appointed by manufacturers for the sale of motor vehicles. Two ways of selling sit side by side in the motor trade. In the traditional dealership model, the dealer buys a fleet of vehicles, designates some of them as demonstration vehicles, and sells vehicles on its own account. In the dealer-agency model, the dealer buys the demo vehicles from the manufacturer (the original equipment manufacturer, or OEM), while the OEM itself sells the new vehicles directly to the customer, with the dealer acting as its agent.
The practical question was whether the agency-model dealer, which does not itself sell the new vehicle to the customer, could still claim ITC on the demo vehicle it bought. Paragraph 4.6 of Circular 231 stood against that claim. Circular 262 now withdraws that paragraph, so the block it imposed no longer stands for agency-model dealers.
2. Why the circular says the block was wrong
The circular's reasoning rests on the identity of purpose and treatment between the two models. The demo vehicle does the same job in both: it is kept for test drives so that customers can try the vehicle before buying. In both models the demo vehicle is bought against a tax invoice, is typically treated as a capital asset, is subject to a mandatory demo-holding period, and is then sold at its written-down value with tax payable on that sale. The vehicles are also treated at par under the Central Motor Vehicle Rules, 1989.
On that footing, denying ITC to one model while allowing it to the other is discriminatory, the circular reasons. The legal route to the same result runs through the words "such motor vehicles" in Section 17(5)(a)(A) of the CGST Act: the provision permits ITC on motor vehicles used for the further supply of similar vehicles, and it is not confined to the specific vehicle that is eventually sold. A demo vehicle used to secure sales of similar vehicles therefore falls within the permitted category, even in the agency model where the eventual sale to the customer is made by the OEM.
3. Old position versus new position
The change is deliberately surgical. Circular 262 does not rewrite Circular 231 as a whole; it withdraws one paragraph. Everything else in Circular 231 continues to apply, and dealers should read the two circulars together, with paragraph 4.6 simply removed from the picture.
Who is affected
The direct beneficiaries are motor vehicle dealers appointed as authorised agents of manufacturers, operating under the agency model — the showrooms that hold demo fleets, arrange test drives, and hand the final sale to the OEM. Manufacturers running agency networks are affected too, because the tax cost of the demo fleet no longer falls differently on their agents than on traditional dealers. Tax advisers to the automobile trade, and the officers assessing dealer returns, will need to apply the withdrawn paragraph's absence in current assessments and in any pending disputes that turned on it.
What to do next
First, confirm the model: the clarification covers dealers in the dealer-agency model, so the dealership agreement and the invoicing pattern — dealer buying demos from the OEM, OEM selling new vehicles directly to customers — should be documented and on file. Second, review demo-fleet ITC positions: credit on demo vehicles that was reversed or not claimed because of paragraph 4.6 should be re-examined, with advice on the correct period and mechanism for any reclaim, since the circular itself withdraws the paragraph rather than prescribing a refund procedure. Third, keep the demo-vehicle trail intact: tax invoices for the demo purchases, records of the mandatory holding period, and the eventual sale at written-down value with tax paid — these are the facts the circular's reasoning relies on. Fourth, update internal checklists and any standard objection replies that still cite paragraph 4.6, so that it is not quoted against a claim after its withdrawal.
What this circular does NOT do
Circular 262 does not rewrite the whole of Section 17(5)(a), does not withdraw any other part of Circular 231, and does not create a general ITC entitlement for motor vehicles beyond the demo-vehicle situation it addresses. It is a clarification for authorised agents in the agency model, grounded in the specific features of demo vehicles — test-drive purpose, tax invoices, capital-asset treatment, mandatory holding period and taxed onward sale at written-down value. A vehicle that does not fit that fact pattern should not be assumed to be covered. This article is based on the circular's text as published on the CBIC Tax Information Portal; the treatment of any specific claim still depends on its own facts, and dealers should take professional advice before changing a filing position.
Frequently asked questions
Can an agency-model dealer now claim ITC on demo vehicles? Yes. Circular 262 clarifies that ITC on demo vehicles is not blocked under Section 17(5)(a) for a dealer in the dealer-agency model, and withdraws paragraph 4.6 of Circular 231, which had stood against the claim.
What is the difference between the agency model and the traditional model? In the traditional model the dealer buys vehicles and sells them on its own account. In the agency model the dealer buys the demo vehicles from the OEM, but the OEM sells the new vehicles directly to the customer, with the dealer acting as agent.
Why does the demo vehicle's purpose matter? Because Section 17(5)(a)(A) permits ITC on motor vehicles used for the further supply of similar vehicles. A demo vehicle exists to secure sales of similar vehicles through test drives, so it falls within that language even though the specific demo car is not itself the car sold to the customer.
Is the whole of Circular 231 withdrawn? No. Only paragraph 4.6 is withdrawn. The rest of Circular 231/25/2024-GST continues to apply.
What records should a dealer keep to support the claim? The tax invoices for the demo vehicles, evidence of the mandatory demo-holding period, capital-asset treatment where applicable, and the record of the eventual sale at written-down value with tax paid — these are the facts the circular relies on.
Does the circular give a procedure for reclaiming ITC reversed earlier? No — the circular withdraws paragraph 4.6 and states the clarified position; it does not prescribe a reclaim mechanism. Dealers with earlier reversals should take advice on the correct period and route for any reclaim.
Sources
Primary source: CBIC Circular No. 262/08/2026-GST dated 26.10.2026, CBIC Tax Information Portal — https://taxinformation.cbic.gov.in/view-pdf/1003353/ENG/Circulars. Earlier circular referred to: Circular No. 231/25/2024-GST dated 10.09.2024. Statutory references are to the Central Goods and Services Tax Act, 2017 and the Central Motor Vehicle Rules, 1989, as cited in the circular.
