Car dealers may have to pay 18% GST on sale of demonstration cars

The ruling has evoked sharp criticism from experts who say it may lead to litigation

Car dealers will have to shell out an 18 per cent goods and services tax (GST) on the reimbursement of losses on sale of demonstration cars from car companies if the West Bengal ruling in a case related to a Mercedes Benz India (MBI) dealer sets a precedent.

The order by Authority for Advance Ruling (AAR) West Bengal evoked sharp criticism from experts who say it may lead to litigation.

The authority also allowed the dealer to claim input tax credit (ITC) on the supply of demonstration cars by Mercedes Benz to him. This part of the judgement was welcomed by experts.

The dealer -- Landmark Cars East Pvt Ltd -- purchases demo vehicles from MBI to provide facilitation services for sale, records the same as purchase of inventory and removes it from inventory when they are sold accounting the entire sale proceeds in the sales account.

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Since demo cars go through some deterioration when they are finally sold to consumers, the dealer has an agreement with MBI to share the losses.

The authority observed that since the dealer has chosen to tolerate the act for a consideration as per the agreement in furtherance of the business, the reimbursement would qualify to be a consideration.

It should be noted that GST is imposed when there is a consideration in sale and purchase.

Rajat Mohan, executive director at Moore Singhi, said this decision may raise eyebrows in the sector.

“This determination rests on the premise of taking it as consideration for supply of services including the agreement to tolerate an act. We posit that this interpretation could face challenges in higher forums, given that loss on sale of demo cars might not inherently fit the definition of a supply under GST regulations,” he said.

The AAR also ruled that the dealer can claim ITC on inward supply of demo cars.

It held that its outward supply would attract the same rate of tax as its inward supply. GST at the rate of 28 per cent is imposed on these cars.

Mohan said this part of judgement on ITC effectively addresses a long-standing concern surrounding the operational costs associated with the showroom management, particularly those related to demonstration vehicles.