Used car dealers under GST margin scheme can avail ITC but with conditions

ITC Relief For Used Car Dealers

The Central Board of Indirect Taxes and Customs has issued two circulars, acting on the GST Council's recommendations, to settle long-pending questions on input tax credit under the margin scheme for second-hand vehicles and on the tax treatment of co-lending arrangements. Under the margin scheme, GST is levied only on the difference between the selling price and the purchase price of a used vehicle, rather than on the entire transaction value, a design meant to avoid taxing the same value twice.

The first clarification addresses whether the condition barring input tax credit, imposed on dealers who opt for the concessional GST and compensation cess rates under the margin scheme notifications, extends beyond the old and used vehicles themselves to other business inputs. Representations had sought clarity on whether the restriction covered items such as spares, repair and maintenance services, technology services, rent, and marketing and advertising services.

CBIC has now stated that the restriction applies only to the tax paid on the procured second-hand vehicles. Dealers operating under the margin scheme may therefore claim credit on other inputs and on input services, including spares, repairs and maintenance, technology, rent, and marketing and advertising. The clarification draws a line between the vehicle being resold and the general business expenses incurred while dealing in such vehicles.

Why The Clarification Matters

For used car dealers, the position removes a source of uncertainty over credits that many had either forgone or claimed under protest. Businesses that structured their procurement and expense booking around a stricter reading of the condition may need to revisit past positions, while those that claimed such credits now have express backing. The clarification also matters for vendors supplying spares and services to dealers, since their output tax treatment interacts with the dealer's credit eligibility.

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