On October 26, 2026, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 262/08/2026-GST, bringing major relief to automobile dealerships operating under agency frameworks.
This circular formally withdraws paragraph 4.6 of earlier Circular No. 231/25/2024-GST (dated September 10, 2024), which had previously blocked Input Tax Credit (ITC) on demo vehicles purchased by authorized agents where Original Equipment Manufacturers (OEMs) billed customers directly.
Below is an in-depth summary and professional analysis prepared by Sagar S Gupta & Co to help automobile dealers and corporate entities navigate this crucial ITC eligibility update.
1. Background & The Previous Controversy
Under Section 17(5)(a) of the CGST Act, 2017, Input Tax Credit is restricted on motor vehicles for the transportation of persons having a seating capacity of up to 13 persons, except when used for specified exceptions, including the “further supply of such motor vehicles”.
- Traditional Model vs. Dealer-Agency Model:
- In the traditional dealership model, the dealer purchases vehicles from the OEM on its own account and resells them to retail customers.
- In the dealer-agency model, authorized agents purchase new vehicles specifically for test-drive/demonstration purposes, while final vehicle sales are invoiced directly by the OEM to the customer.
- The Prior Restriction: Under para 4.6 of Circular No. 231/25/2024-GST, tax authorities took the stand that because dealers in an agency setup do not sell vehicles on their own account, demo vehicles cannot be said to be used for “further supply,” thereby blocking ITC under Section 17(5)(a)(A).
2. Core Rationales for Withdrawal and Grant of ITC
Representations from trade and industry highlighted that denying ITC to the dealer-agency model created unjust discrimination despite identical commercial realities. The CBIC examined these submissions and established the following key principles in Circular No. 262/08/2026-GST:
- Identical Functional Purpose: In both business models, demo vehicles serve the exact same commercial purpose—enabling customers to experience test drives to promote and foster vehicle sales.
- Capital Asset Accounting & Compliance: In both models, demo vehicles are purchased against tax invoices, capitalized as capital assets in the dealer’s books, held for mandatory periods as per the Central Motor Vehicle Rules, 1989, and subsequently sold at written-down values with applicable GST discharged.
- Statutory Interpretation of “Such Motor Vehicles”: The statutory phrasing in Section 17(5)(a)(A)—“such motor vehicles” rather than “said motor vehicle”—indicates that the legislature permitted ITC not just on the specific vehicle sold, but on vehicles utilized to promote and further the supply of similar motor vehicles.
3. Summary of CBIC Clarification
- Withdrawal: Paragraph 4.6 of Circular No. 231/25/2024-GST is rescinded with immediate effect.
- ITC Admissibility: Input Tax Credit on demo vehicles is NOT blocked under Section 17(5)(a) of the CGST Act for authorized dealers operating under the dealer-agency model.
- Level Playing Field: Both traditional dealership models and dealer-agency frameworks enjoy parity regarding ITC eligibility on test-drive/demo vehicles.
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Contact Sagar S Gupta & Co today to evaluate how this favorable circular impacts your dealership’s tax credits and cash flow.
On October 26, 2026, the Central Board of Indirect Taxes and Customs (CBIC) issued a series of eight pivotal circulars (Circular Nos. 257/03/2026-GST to 264/10/2026-GST). These circulars operationalize key recommendations from the 57th GST Council Meeting, bringing much-needed uniformity, procedural clarity, and taxpayer relief across registration, adjudication, pre-deposits, Input Service Distributor (ISD) mechanisms, banking sector compliance, motor vehicle credits, and export refunds.
Below is a consolidated executive summary prepared by Sagar S Gupta & Co outlining the core takeaways from each circular.
| Number | Date | Category |
| 264/10/2026-GST | 26-Oct-2026 | Clarification in respect of the omission of rule 96(10) of the Central Goods and Services Tax Rules, 2017. |
| 263/09/2026-GST | 26-Oct-2026 | Clarification in respect of receipt of payment for export of goods or services. |
| 262/08/2026-GST | 26-Oct-2026 | Clarification on Input Tax Credit admissibility to authorised agents appointed by manufacturers for sale of motor vehicles, pursuant to Circular No. 231/25/2024-GST dated 10.09.2024. |
| 261/07/2026-GST | 26-Oct-2026 | Clarification on issues related to provisions of section 17(4) of the Central Goods and Services Tax Act, 2017. |
| 260/06/2026-GST | 26-Oct-2026 | Clarification on issues pertaining to Input Service Distributor. |
| 259/05/2026-GST | 26-Oct-2026 | Clarification on various issues pertaining to the amount paid as pre-deposit as per sub-section (6) of section 107 or sub-section (8) of section 112 of the CGST Act |
| 258/04/2026-GST | 26-Oct-2026 | Clarification on issues related to demand, adjudication and appeal proceedings under the CGST Act, 2017. |
| 257/03/2026-GST | 26-Oct-2026 | Guidelines for the handling of applications for GST registration. |
Disclaimer
This article is published for educational and informational purposes based on CBIC Circular No. 262/08/2026-GST dated October 26, 2026. Readers and corporate taxpayers are advised to consult the professionals for tailored advice.