CBIC Clarifies Input Tax Credit Rules for Used Car Dealers Under GST Margin Scheme

The Central Board of Indirect Taxes and Customs (CBIC) has issued clarifications regarding tax regulations, addressing Input Tax Credit (ITC) eligibility for used car dealers and the taxability of services under co-lending arrangements.

Based on the recommendations of the GST Council, the CBIC stated that used car dealers operating under the GST margin scheme are permitted to avail ITC on various inputs, including goods and services. The margin scheme acts as a special valuation method designed to prevent double taxation by levying GST exclusively on the profit margin—calculated as the selling price minus the purchase price—rather than on the full transaction value.

The board further clarified that existing restrictions on availing ITC to secure concessional GST and Compensation Cess rates under margin scheme notifications do not apply to general inputs and input services, excluding the old and used motor vehicles themselves.

In a separate circular, the CBIC addressed the taxability of services rendered by Non-Banking Financial Companies (NBFCs) to banks within co-lending arrangements. Under this model, banks and NBFCs jointly extend credit to borrowers in pre-agreed proportions, combining the lower cost of funds from banks with the broader reach of NBFCs. Borrowers are typically charged a blended rate of interest.

According to Reserve Bank of India directions, NBFCs provide lending services to partner banks in a co-lending arrangement. These responsibilities primarily involve customer sourcing, Know Your Customer (KYC) compliance, credit appraisal, underwriting, loan servicing, monitoring, repayment collection, and recovery. Because the NBFC acts as the primary interface with the borrower, it handles these operational touchpoints.

The Reserve Bank of India dictates that regulated entities participating in co-lending partnerships must determine objective criteria for establishing fees or charges payable for these services. The CBIC confirmed that the lending services provided by an NBFC to a bank under a co-lending arrangement are taxable under GST. The taxable value of these services will be determined by the figures specified in the contractual agreement established between the NBFC and the bank.

"The clarifications issued by the CBIC provide much-needed regulatory direction for businesses operating under specific financial frameworks. Allowing Input Tax Credit on general inputs for used car dealers under the margin scheme helps streamline compliance and avoids ambiguities in tax calculation. Similarly, establishing clear taxability guidelines for NBFC lending services in co-lending partnerships offers financial institutions operational clarity regarding contractual values and GST obligations." — Dr. Shishir Gupta, Founder & CEO, StartupLanes