By CA Surekha Ahuja
Kerala AAR in Goexotic Plus91 Motors (P.) Ltd. – The Definitive Law Explained
Executive Summary
The Kerala Authority for Advance Rulings in Goexotic Plus91 Motors (P.) Ltd. (AAR No. KER/42/2025 dated 11 December 2025; reported at 182 taxmann.com 676) has conclusively settled one of the most litigated issues in the used motor vehicle trade under GST.
The ruling authoritatively holds that a dealer paying GST under the margin scheme in terms of Rule 32(5) of the CGST Rules is entitled to full Input Tax Credit on repairs, refurbishment, spare parts, common overheads and capital goods, with only one restriction — no ITC can be claimed on the purchase of the used motor vehicle itself.
Further, negative margins are statutorily ignored, resulting in nil GST liability without triggering ITC reversal, provided the dealer remains compliant with the core statutory conditions.
This ruling is legally sound, textually faithful to the statute, and strategically transformative for organised used-car dealers.
Why a Special Margin Scheme for Used Motor Vehicles Exists
Used motor vehicles have already suffered indirect taxes at the time of their first supply. Taxing the entire resale value would result in double taxation without incremental value addition. To correct this distortion, Rule 32(5) of the CGST Rules introduces a special valuation mechanism whereby GST is levied only on the margin, that is:
Selling price minus purchase price
This concessional valuation is a legislative bargain. In exchange for paying tax only on value addition, the dealer agrees not to avail ITC on the purchase of the used vehicle.
Notification No. 8/2018–Central Tax (Rate) operationalises this scheme by prescribing the applicable rates and explicitly addressing the treatment of negative margins.
Statutory Architecture: How the Provisions Interlock
A correct understanding emerges only when the provisions are read together:
Section 9 establishes levy of GST on taxable supplies. Section 15 governs valuation, subject to prescribed rules. Rule 32(5) provides a special valuation rule for second-hand goods, including used motor vehicles. Notification 8/2018 prescribes the rate and conditions, including treatment of negative margins. Sections 16 and 17 govern eligibility and restrictions on Input Tax Credit.
Crucially, Rule 32(5) restricts ITC only in respect of the purchase of such goods. It does not expand the restriction to any other inward supplies.
In fiscal law, restrictions must be express and narrowly construed. This principle has been repeatedly affirmed by the Supreme Court, including in Dilip Kumar and Company v. Commissioner of Customs.
The Core Issue Before the Kerala AAR
The applicant was engaged in the business of buying and selling used motor vehicles. Before resale, the vehicles underwent:
Minor repairs and refurbishments Replacement of spare parts Denting, painting and mechanical corrections
The applicant also incurred common business expenses such as showroom rent, advertising, professional fees, telephone expenses and purchased capital goods like workshop tools and computers.
The legal question was precise:
Whether Notification 8/2018 or Rule 32(5) bars ITC not only on vehicle purchases but also on repairs, spares, refurbishment services, overheads and capital goods.
Kerala AAR’s Ruling: Clean, Narrow and Statutorily Faithful
The AAR answered the question decisively in favour of the taxpayer.
1. Scope of ITC Restriction Is Limited
The Authority examined Paragraph 2 of Notification 8/2018 and held that the denial of ITC is strictly confined to the inward supply of used motor vehicles meant for resale.
There is no legislative language extending this denial to:
Spare parts Repair or refurbishment services Common business inputs Capital goods
2. Repairs and Refurbishment Are in Furtherance of Business
The AAR recognised that minor refurbishment enhances the marketability of vehicles without altering their essential character. Such activities are integral to the business of trading in used vehicles and squarely fall within the phrase “in the course or furtherance of business” under Section 16.
3. Section 17(5) Does Not Apply
The blocking provision for motor vehicles under Section 17(5) applies to vehicles used as capital assets for transportation. It does not apply to motor vehicles held as trading stock.
Accordingly, ITC on tools, equipment and services used for refurbishing trading stock remains fully admissible.
4. Nil or Negative Margin Supplies Are Taxable Supplies
The Authority clarified that when margin is zero or negative, the supply does not become exempt. It remains a taxable supply with nil taxable value. Therefore, Rules 42 and 43 have no application, and no reversal of common ITC is required.
Treatment of Negative Margin: Statutory Finality
Notification 8/2018 expressly provides that where the margin is negative, it shall be ignored.
The legal consequences are:
No GST payable on that transaction No set-off or carry forward of negative margins Each vehicle treated as an independent supply
Importantly, ignoring negative margin does not convert the supply into an exempt supply under Section 2(47). Absence of exemption notification is fatal to any such argument.
This position aligns with multiple AAR rulings across States and reflects uniform statutory interpretation.
Margin Computation: What Must and Must Not Be Included
Margin computation under Rule 32(5) is rigid and mechanical.
Only the following are relevant:
Selling price Purchase price
The following must never be adjusted against margin:
Repair or refurbishment costs Spare parts Overheads Depreciation or notional adjustments
Valuation and ITC operate in separate statutory compartments. Mixing them is the most common cause of audit disputes.
ITC Eligibility Matrix
Used vehicle purchase – ITC not eligible Spare parts and repairs – ITC eligible Refurbishment services – ITC eligible Rent, advertisement, professional fees – ITC eligible Capital goods such as tools and computers – ITC eligible Negative margin supplies – no ITC reversal
Audit-Proof Compliance Checklist
To remain litigation-safe, dealers should ensure:
No ITC is claimed on used vehicle purchases Vehicle-wise margin working papers are maintained Repair costs are never deducted from margin ITC on repairs and overheads is booked separately Invoices clearly reflect business use Negative margins are ignored and not netted Standard operating procedures document refurbishment activity
Paras 7.4 to 7.10 of the Kerala AAR order should be specifically cited in replies to audit objections.
Strategic Tax Planning Insight
For organised dealers, the margin scheme combined with unrestricted ITC on operational inputs creates a structurally efficient GST model.
The scheme is especially beneficial where gross margins are moderate, operational costs are significant and refurbishment activity is routine.
With the post-2025 expansion of the used vehicle and electric vehicle ecosystem, this ruling provides a decisive compliance advantage to disciplined players.
Final Takeaway
The law is now clear and internally consistent:
The margin scheme restricts ITC only on the purchase of used motor vehicles. It does not, and cannot, block ITC on repairs, refurbishment, spares, overheads or capital goods. Negative margins result in nil GST without triggering reversal.
The Kerala AAR ruling in Goexotic Plus91 Motors stands on strong statutory footing and offers a robust defence framework for dealers nationwide.
For the used motor vehicle trade, this is not merely a ruling — it is a compliance blueprint.
