Karnataka AAR Clarifies ITC Eligibility on Ancillary Expenses for Used Car Dealers Availing Notification No. 08/2018-CGST (Rate)

Karnataka Authority for Advance Ruling (AAR) has delivered a significant clarification regarding the eligibility of input tax credit (ITC) for businesses engaged in the sale of used motor vehicles while availing the margin scheme under Notification No. 08/2018-CGST (Rate). The ruling addresses whether such businesses can claim ITC on ancillary goods and services, excluding the purchase of used vehicles themselves.

The applicant, a company engaged in buying, refurbishing, and selling used passenger vehicles, sought an advance ruling on its eligibility to claim ITC on various business expenses. These included refurbishment charges, marketing and advertisement expenses, professional fees, housekeeping, rent, office expenses, software subscriptions, manpower recruitment, administrative overheads, and capital goods such as laptops and furniture. The applicant argued that while Notification No. 08/2018-CGST (Rate) restricts ITC on the purchase of used vehicles, it does not extend this restriction to other goods and services used in the course of business.

In its detailed analysis, the AAR examined the language of Notification No. 08/2018-CGST (Rate) and corresponding state notifications. The authority emphasized that the notification applies specifically to ‘such goods’—namely, the old and used motor vehicles listed in the notification’s table. The restriction on availing ITC, as per the notification, is limited to these vehicles and does not extend to other inputs or input services. The AAR relied on principles of statutory interpretation, noting that the phrase ‘such goods’ must be read in its natural and plain meaning, and that a broader restriction would have required explicit language.

The AAR further referred to Section 16 of the CGST Act, 2017, which governs eligibility for ITC, and found no restriction on claiming ITC for input services and related expenses such as refurbishment, marketing, professional fees, housekeeping, rent, software subscriptions, and capital goods, provided the statutory conditions are satisfied. The authority also examined Section 17(5) of the CGST Act, which lists blocked credits, and found that none of the exclusions applied to the ancillary goods and services in question.

The ruling recognized that operational and administrative expenses incurred after the purchase of used vehicles—such as refurbishment, marketing, and professional services—are essential for the business and directly contribute to the enhancement of the vehicles’ sale value and marketability. The input tax paid on such inward supplies, therefore, qualifies as ITC under Section 16 of the CGST Act and is not restricted by the notification, which only bars ITC on the used vehicles themselves.

In conclusion, the Karnataka AAR ruled that businesses availing the margin scheme under Notification No. 08/2018-CGST (Rate) are eligible to claim ITC on input services and capital goods other than the purchase of used vehicles, subject to compliance with Sections 16 to 21 of the CGST Act and Rules 36 to 45 of the CGST Rules. The decision provides much-needed clarity for used car dealers and similar businesses regarding the scope of ITC restrictions under the margin scheme.