ITC relief for dealers under GST Margin scheme

The GST treatment of second-hand motor vehicles has always raised a critical question for dealers:

If you opt for the Margin Scheme under Rule 32(5), does that mean losing Input Tax Credit (ITC) on all business expenses?

In a significant clarification, the Kerala Authority for Advance Ruling (AAR) in M/s Goexotic Plus91 Motors Pvt. Ltd. (Order No. KER/42/2025) has addressed this issue and provided much-needed relief to pre-owned and luxury vehicle dealers.

The ruling clearly distinguishes between ITC restrictions on vehicle purchase and eligibility of ITC on other business inputs — bringing clarity to an area that often led to conservative tax positions and unnecessary credit reversals.

Let’s understand what this means for businesses.

Understanding the GST Margin Scheme (Rule 32(5))

Under Rule 32(5) of the CGST Rules, dealers in second-hand goods — including used motor vehicles — can pay GST only on the margin, i.e., the difference between selling price and purchase price.

Key features of the scheme:

• GST is payable only on the margin.
  
  
• If the margin is negative, it is treated as zero.
  
  
• ITC cannot be claimed on the purchase of the used vehicle if the margin scheme is adopted.

While the restriction on vehicle purchase was clear, confusion persisted regarding ITC on:

• Repairs and refurbishment
  
  
• Spare parts
  
  
• Rent and business overheads
  
  
• Capital goods

This is where the Kerala AAR ruling becomes important.

What Was the Issue Before the AAR?

The applicant, engaged in trading second-hand luxury cars:

• Purchased vehicles from registered and unregistered suppliers.
  
  
• Undertook minor repairs, servicing, and refurbishment before resale.
  
  
• Paid GST only on margin under Rule 32(5).
  
  
• Did not claim ITC on the purchase of vehicles.

ITC Eligibility: What the Kerala AAR Clarified

The ruling provides a structured and logical interpretation of the law.

ITC Allowed on Refurbishment and Ancillary Inputs

The AAR clarified that ITC is admissible on:

• Spare parts used for repair
  
  
• Servicing charges
  
  
• Refurbishment expenses
  
  
• Other direct inputs used to make vehicles sale-ready
  
  

These expenses are separate from the purchase of the vehicle itself and qualify under Section 16 of the CGST Act as inputs used in the course or furtherance of business.

Important distinction:‍

The restriction under Rule 32(5) applies only to the purchase of the used vehicle — not to other inward supplies.

ITC Allowed on Common Business Expenses

Dealers can also claim ITC on:

• Showroom or office rent
  
  
• Advertising expenses
  
  
• Telephone and internet services
  
  
• Professional fees
  
  
• Security and maintenance services

These are normal business overheads and are not restricted under the margin scheme.

ITC Allowed on Capital Goods

The ruling also supports ITC eligibility on:

• Workshop machinery
  
  
• Tools and equipment
  
  
• Office computers
  
  
• Business-use capital assets

As long as the conditions under Sections 16–21 and Rules 36–45 are satisfied, credit is available.

ITC Not Allowed on Purchase of Used Vehicles

The restriction remains intact for:

• Tax paid on the purchase of the used motor vehicle itself.

This is the core condition of operating under the margin scheme.

If ITC is claimed on vehicle purchase, the margin scheme benefit cannot be used.

The Most Important Clarification: Nil Margin vs Exempt Supply

One of the biggest practical concerns for dealers was this:

If a vehicle is sold at no profit (or even at a loss), does that become an “exempt supply”?

Why does this matter?

Because if treated as exempt, dealers would need to reverse proportionate common ITC under Rules 42 and 43 — impacting working capital.

AAR’s Clear Position

A sale with:

• Nil margin, or
  
  
• Negative margin

Is still a taxable supply, but with zero taxable value.

It is not an exempt supply.

Impact of This Clarification

Since it is not classified as exempt:

• No ITC reversal is required.
  
  
• Common credits remain fully available.
  
  
• Dealers are protected from unnecessary credit reductions.

This prevents the margin scheme from becoming a compliance burden for businesses operating on thin or fluctuating margins.

What This Means for Used-Car Dealers

The ruling strengthens compliance clarity in several ways:

1. Reduced GST Cost

ITC on repairs and overheads lowers effective tax burden.

2. Better Working Capital Management

No forced ITC reversal on nil-margin sales protects liquidity.

3. Compliance Confidence

Dealers can adopt the margin scheme without fearing blanket ITC denial.

4. Support for Organized Sector

Clarity promotes formalization of the pre-owned vehicle market.

Key Compliance Takeaways

If your business deals in second-hand vehicles under the margin scheme:

• Do not claim ITC on vehicle purchase.
  
  
• Maintain proper documentation for refurbishment and overhead expenses.
  
  
• Claim ITC on eligible inputs and capital goods.
  
  
• Ensure compliance with Section 16 conditions.
  
  
• Do not treat nil-margin sales as exempt supplies.

Proper classification and documentation remain essential to withstand departmental scrutiny.

Conclusion

The Kerala AAR ruling in Goexotic Plus91 Motors Pvt. Ltd. (KER/42/2025) reinforces an important GST principle:

Restriction under the margin scheme is specific, not absolute.

While ITC on vehicle purchase is restricted, legitimate business inputs, overheads, and capital goods remain eligible for credit.

For pre-owned vehicle dealers, this ruling ensures that the margin scheme continues to serve its intended purpose, preventing double taxation without creating unintended ITC blockages.

As GST compliance continues to evolve, such clarifications play a crucial role in aligning tax interpretation with business realities.