By CA Surekha S Ahuja
A used-car dealer may pay GST on the prescribed margin instead of the full selling price. However, where the applicable margin-scheme notification requires non-availment of ITC, the dealer cannot claim credit on the used vehicle purchased for resale.
Does this restriction also deny ITC on spare parts, repairs, rent, advertising, software, laptops, air-conditioners and other business assets?
No. The restriction on the used vehicle does not automatically extend to every business expense of the dealership.
CBIC Circular No. 265/11/2026-GST dated 28 October 2026 clarifies that the ITC restriction under the specified used-vehicle margin-scheme notifications does not apply to eligible inputs other than the used vehicles themselves and to input services.
Capital goods, however, require a separate examination under the CGST Act. This distinction is important for every used-car dealer reviewing ITC eligibility and earlier reversals.
1. What does Circular 265 actually clarify?
Issued under Section 168(1) of the CGST Act, 2017, following the 57th GST Council meeting held on 8 October 2026, the circular addresses the scope of the non-availment condition under the relevant margin-scheme notifications.
It clarifies that the restriction does not extend to ITC on:
Spare parts and other inputs used in the dealership.
Repairs and maintenance services.
Technology services and software.
Showroom and office rent.
Marketing and advertising services.
The practical position is:
| Purchase or expenditure | ITC position |
|---|---|
| Used vehicle purchased for resale under the margin scheme | Restricted where the notification's non-availment condition applies |
| Spare parts and other business inputs | Eligible, subject to Sections 16 and 17 |
| Repairs and maintenance services | Eligible, subject to Sections 16 and 17, including Section 17(5)(ab), where relevant |
| Rent, software and technology services | Eligible, subject to statutory conditions |
| Advertising and marketing | Eligible, subject to statutory conditions |
| Laptops, computers, ACs and workshop machinery | Independently examine under Sections 16 and 17 |
The circular removes the blanket denial of dealership ITC. It does not grant unconditional credit on every purchase.
2. Margin valuation: Do not confuse Rule 32(5) with the special motor-vehicle notification
Rule 32(5) of the CGST Rules provides a valuation mechanism for second-hand goods sold as such or after minor processing that does not change their nature, where ITC has not been availed on their purchase.
The value is generally the difference between the selling price and purchase price. A negative difference is ignored.
However, old and used motor vehicles covered by Notification No. 08/2018-Central Tax (Rate), as amended, have a specific valuation formula:
Where depreciation under Section 32 of the Income-tax Act has been claimed: consideration received on sale less the depreciated value of the vehicle on the date of supply.
In other cases: selling price less purchase price.
Negative margin: ignored.
For example:
| Particulars | Amount |
|---|---|
| Purchase price | Rs 8,00,000 |
| Selling price | Rs 9,50,000 |
| Margin, where depreciation has not been claimed | Rs 1,50,000 |
Repair expenditure does not reduce this prescribed margin. It must be examined separately for ITC eligibility.
The dealer must also verify that the vehicle and transaction satisfy the relevant notification conditions, including the non-availment condition on the vehicle itself. Rule 32(5) should not be mechanically substituted for the specific motor-vehicle notification formula.
3. What is the GST rate on qualifying used vehicles?
The normal GST rate structure for new motor vehicles changed with effect from 22 September 2025. Certain categories fall under an 18% schedule and specified larger or luxury vehicles under a 40% schedule.
These normal vehicle rates must not be confused with the special margin-scheme rate.
The relevant amendments include:
Notification No. 04/2025-Central Tax (Rate) and Notification No. 04/2025-Integrated Tax (Rate), both dated 16 January 2025.
Notification No. 12/2025-Central Tax (Rate) and Notification No. 12/2025-Integrated Tax (Rate), both dated 17 September 2025, effective from 22 September 2025.
For qualifying supplies covered by the amended used-vehicle margin-scheme notifications, the GST rate is 18% on the prescribed margin:
| Nature of supply | GST |
|---|---|
| Intra-State supply | 9% CGST + 9% SGST |
| Inter-State supply | 18% IGST |
Compensation Cess must be examined separately. Serial No. 42A of Notification No. 01/2018-Compensation Cess (Rate), as amended, provides a nil rate for qualifying old and used motor vehicles subject to its conditions, including non-availment of specified credit on the vehicle.
Therefore, a dealer should not automatically apply the normal 40% rate or Compensation Cess to a qualifying margin-scheme transaction.
4. Repairs, spares and business expenses: Where ITC can be claimed
Section 16(1) permits ITC on goods and services used or intended to be used in the course or furtherance of business, subject to the statutory conditions.
Section 16(2) requires compliance with the prescribed documentary, receipt, supplier-reporting, tax-payment and return-filing conditions.
Accordingly, ITC on spare parts, workshop consumables, rent, software, advertising and other eligible business expenses can be claimed even though the dealership sells used vehicles under the margin scheme.
One important qualification: Section 17(5)(ab) restricts credit on specified servicing, repair and maintenance services relating to motor vehicles covered by Section 17(5)(a) and (aa), subject to statutory exceptions.
Vehicles held for further taxable supply must be distinguished from vehicles used for staff or management transport. The further-supply exception under Section 17(5)(a) is relevant to the former. The corresponding restriction on repair services must be examined under Section 17(5)(ab).
Circular 265 does not override these restrictions.
5. Capital goods: Laptops, ACs and machinery need a separate test
Circular 265 expressly clarifies the position for inputs other than the used vehicles and for input services. It does not expressly grant a separate entitlement for capital goods.
Capital goods are separately defined under Section 2(19), while Section 2(59) excludes them from the definition of inputs.
Their ITC eligibility must therefore be examined independently under Sections 16 and 17.
| Asset | General position |
|---|---|
| Laptops, desktops and servers | Generally eligible for business use |
| Printers and networking equipment | Generally eligible |
| Standalone movable ACs | Generally eligible, subject to facts |
| CCTV and security equipment | Generally eligible, subject to installation and use |
| Workshop machinery and diagnostic equipment | Generally eligible |
| Civil construction and structural works | Examine restrictions under Section 17(5)(c) and (d) |
Section 16(3) prohibits ITC where depreciation has been claimed on the GST component of the asset's cost under the Income-tax Act.
Building-related expenditure requires particular care. Section 17(5)(c) and (d) restrict specified works contract and construction-related credits, subject to the statutory definition and exceptions for plant and machinery.
Further, Section 124 of the Finance Act, 2025 substituted “plant or machinery” with “plant and machinery” in Section 17(5)(d), with effect deemed from 1 July 2017. The amendment was brought into force from 1 October 2025.
The amendment must be read with Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., 2024 INSC 756. Dealers should not rely on the earlier wording or assume that the functionality test alone establishes eligibility under the amended provision.
A standalone movable AC and an integrated building HVAC installation may therefore require different treatment. Invoices, asset registers, technical specifications and installation records should be maintained.
6. Demo vehicles: A different ITC situation
CBIC Circular No. 231/25/2024-GST dated 10 September 2024 clarifies ITC on demo vehicles used by authorised dealers for trial runs and demonstrations.
Section 17(5)(a) generally blocks ITC on specified passenger motor vehicles, subject to exceptions, including use for making further supply of such vehicles.
The circular recognises that an authorised dealer using demo vehicles to promote further supply of similar vehicles can fall within this exception, subject to the facts.
However, the position is different where the dealer merely provides marketing or facilitation services for a manufacturer and is not itself making further supply of the vehicles.
Capitalisation of a demo vehicle does not, by itself, deny ITC. But Section 16(3) must be respected: depreciation cannot be claimed on the GST component where ITC is taken.
On subsequent sale of a demo vehicle on which ITC has been availed, Section 18(6), read with Rule 44(6), requires payment of the higher of:
ITC taken, reduced by 5 percentage points for every quarter or part thereof from the date of invoice; or
Tax on the transaction value.
A demo vehicle on which ITC has been claimed must not automatically be brought under the used-vehicle margin scheme. The notification's non-availment condition must first be examined.
7. Nil margin, common credit and earlier-period reversals
A nil or negative margin does not automatically make the supply exempt. It remains a taxable supply under the applicable margin valuation mechanism.
Consequently, a dealer should not reverse common ITC merely because a vehicle is sold at nil margin. Section 17(2) and Rules 42 and 43 continue to apply where there are actual exempt supplies or non-business use.
The Kerala AAR ruling in Goexotic Plus91 Motors Private Limited, KER/42/2025 dated 11 December 2025, is relevant. It considered ITC on direct expenses, common business expenses and capital goods of a second-hand motor-vehicle dealer and treated margin-scheme sales as taxable supplies.
The ruling binds only the applicant and the concerned or jurisdictional officer under Section 103. It may be persuasive elsewhere but is not a universally binding precedent.
Can earlier ITC reversals be reviewed?
Yes, but Circular 265 does not automatically reopen concluded assessments or create an unconditional refund entitlement.
Dealers should review:
Whether credit was reversed only because the entire dealership was considered ineligible.
Whether the underlying goods or services satisfy Sections 16 and 17.
Whether any specific blocked-credit provision applies.
Whether the time limit under Section 16(4) or a statutory exception under Sections 16(5) or 16(6) is available.
Whether the matter has attained finality and what remedy remains legally available.
In Suchitra Components Ltd. v. CCE, Guntur, 2007 (208) ELT 321 (SC), the Supreme Court recognised the retrospective application of beneficial circulars in the circumstances considered by it.
Circular 265 supports the interpretation that the margin-scheme restriction does not extend to other eligible inputs and input services. However, statutory time limits, procedural requirements, final orders and refund conditions continue to apply.
8. Practical action checklist for used-car dealers
| Area | Immediate action |
|---|---|
| Used vehicle purchases | Maintain vehicle-wise purchase records and evidence of non-availment of ITC |
| Margin computation | Apply the correct notification formula, including depreciation treatment where relevant |
| GST and cess | Verify the applicable margin-scheme rate and nil cess conditions |
| Spares and repairs | Identify eligible inputs and services; test Section 17(5)(ab) |
| Rent and advertising | Verify business use, invoices and Section 16 conditions |
| Capital goods | Maintain a separate asset-wise ITC register |
| Demo vehicles | Preserve authorisation, demonstration records and subsequent-sale computation |
| Common credit | Apply Rules 42 and 43 wherever required |
| Earlier reversals | Review the legal basis, limitation and available remedy |
CA S.Ahuja Perspective
The real issue for a used-car dealer is not whether ITC can be claimed on the vehicle purchased under the margin scheme. Where the notification requires non-availment, it cannot.
The real issue is whether that restriction has been wrongly extended to the entire dealership.
Circular 265 draws an important boundary: the restriction on the used vehicle does not automatically travel to other inputs and input services. Capital goods must be tested independently under the Act.
Dealers should now review their ITC records, identify reversals based only on a blanket interpretation, separate eligible credits from blocked credits and document the legal basis for each category.
The vehicle may be under the margin scheme. The entire dealership is not outside the ITC framework.
That is the distinction Circular 265 brings into focus—and the distinction every used-car dealer should build into its GST controls.
