GST Circular 265/11/2026: ITC for Used Car Dealers, Toy Rates Cover All Heading 9503
The Central Board of Indirect Taxes and Customs has issued Circular No. 265/11/2026-GST dated 28 October 2026, settling four classification and input tax credit disputes that the GST Council took up at its 57th meeting on 8 October 2026. The most consequential parts are for dealers in second-hand cars, who can now claim ITC on spares, repairs, rent, technology and marketing even while paying tax on the margin, and for the toy trade, where the 5% and 18% entries now cover every toy under heading 9503 and not only tricycles, scooters and pedal cars. The circular also fixes the classification of sublimation paper and sea-weed extract based bio-stimulants.
The circular is issued under section 168(1) of the CGST Act, 2017, by the Tax Research Unit (F. No. CBIC-190354/142/2026-TRU) and is addressed to all Principal Chief Commissioners and Commissioners of Central Tax, who are told to instruct field formations accordingly. It does not change any rate or notification entry; it tells officers how the existing entries in Notification No. 09/2025-Central Tax (Rate) dated 17 September 2025 and the 2018 margin scheme notifications are to be read. The full text is available as Circular No. 265/11/2026-GST on the CBIC tax information portal.
The table sets out the four issues, the question that was in dispute and the answer the Board has now given.
| Item | Question in dispute | Clarification | Past periods |
|---|---|---|---|
| Second-hand motor vehicles under the margin scheme | Whether the no-ITC condition covers all inputs and input services or only the vehicles bought | Restriction applies only to tax paid on the procured second-hand vehicles; ITC on other inputs and input services allowed under the CGST Act | No regularisation clause; the clarification reads the existing condition |
| Toys, heading 9503 | Whether S. No. 497 (Schedule I) and S. No. 616 (Schedule II) cover only tricycles, scooters and pedal cars | All toys under heading 9503 are covered: 5% for non-electronic, 18% for electronic, including parts and accessories | No regularisation clause |
| Sublimation paper | Heading 4809 or sub-heading 4810 22 | Heading 4809, taxed at 18% under S. No. 176 of Schedule II | Regularised on an "as is where is" basis |
| Sea-weed extract bio-stimulants | Fertiliser under heading 3101 or plant growth regulator under heading 3808 | Heading 3101 under S. No. 237 of Schedule I, if registered under Schedule VI of the Fertiliser (Inorganic, Organic or Mixed) (Control) Order, 1985 | Regularised on an "as is where is" basis |
ITC for used car dealers under the GST margin scheme
Dealers in old and used motor vehicles have had the option, since January 2018, of paying GST and compensation cess at concessional rates on the margin rather than on the full sale price. That concession comes from Notification No. 08/2018-Central Tax (Rate), Notification No. 09/2018-Integrated Tax (Rate) and Notification No. 01/2018-Compensation Cess (Rate), all dated 25 January 2018. Each carries a condition that input tax credit is not availed.
The question referred to the Council, as paragraph 3.1 of the circular puts it, was whether that no-ITC condition applies only to the motor vehicles or to all inputs and input services of the dealer. Read the wide way, a dealer opting for the margin rate would lose credit on everything it buys to run the business, from workshop spares to showroom rent. Read the narrow way, the condition attaches only to the vehicle on which the concession is given, which is the item whose purchase price the margin already keeps out of tax.
Paragraph 3.2 of the circular accepts the dealers' reading. The restriction does not apply to ITC on inputs other than the used vehicles, or to input services, and the circular names spares, repairs and maintenance, technology services, rent, and marketing and advertising as examples. Suppliers may avail this ITC subject to the provisions of the CGST Act. The restriction applies only to the tax paid on the procured second-hand vehicles.
Two limits stay in place. The ITC on the vehicles themselves remains barred, so where a dealer buys a used car from a registered seller who charges GST, that tax still cannot be taken as credit if the dealer sells the car under the margin scheme. And the general conditions in sections 16 and 17 still apply, including the blocked credits in section 17(5) and the apportionment rules where a dealer also makes exempt supplies.
An illustration with assumed figures shows the effect. A used car dealer in Pune pays monthly showroom rent of ₹2,00,000 with GST of ₹36,000, advertising on a car portal of ₹60,000 with GST of ₹10,800, and buys spares worth ₹50,000 with GST of ₹9,000 for refurbishing cars before sale. Under the restrictive reading, the dealer would have had to forgo ₹55,800 of credit every month (₹36,000 plus ₹10,800 plus ₹9,000). After the circular, the whole ₹55,800 is available, subject to the usual conditions. If the dealer also bought one car during the month from a registered dealer who charged GST, the tax on that car stays outside the credit pool.
The circular does not contain an "as is where is" clause for this issue, unlike the sublimation paper and bio-stimulant items. Since paragraph 3 explains what the 2018 condition always meant rather than changing it, dealers facing show cause notices or audit objections that deny credit on services for earlier periods can place the circular before the adjudicating officer. Dealers who reversed such credit on their own should look at whether it can be re-availed within the time limit in section 16(4) for the relevant financial year.
GST rate on toys: every heading 9503 toy is covered
Notification No. 09/2025-Central Tax (Rate) describes S. No. 497 of Schedule I as non-electronic toys such as tricycles, scooters, pedal cars and the like, including parts and accessories, taxed at 5%. S. No. 616 of Schedule II carries the same description for electronic toys at 18%. Paragraph 2.3 of the circular records that field formations read these entries restrictively, which caused ambiguity and inconsistent treatment of toys that are not ride-on or wheeled.
The Board has now clarified that the word "etc." in both entries takes in all toys under heading 9503 of the Customs Tariff, including dolls' carriages, dolls, other toys, reduced-size scale models and similar recreational models whether working or not, and puzzles of all kinds. The working rule for manufacturers, importers and retailers of toys is short: a non-electronic toy under heading 9503 is taxed at 5%, an electronic one at 18%. The line between the two is the only classification question that remains.
Businesses that charged 18% on non-electronic dolls, board puzzles or model kits because of the narrow reading should correct their item masters and e-invoice HSN mapping from the next invoice. For past invoices where excess tax was charged and collected from customers, any refund claim will face the unjust enrichment test in section 54, so the decision to claim needs to be made invoice class by invoice class.
Sublimation paper and bio-stimulants: past cases regularised
Sublimation paper, used for heat transfer printing on textiles and mugs, was being classified by some taxpayers under sub-heading 4810 22 and by others under heading 4809. The circular settles it under heading 4809, taxed at 18% under S. No. 176 of Schedule II to Notification No. 09/2025-Central Tax (Rate). Past disputes are regularised on an "as is where is" basis, which means no refund where tax was paid at a different rate and no fresh demand where it was not.
Sea-weed extract based bio-stimulants registered under Schedule VI of the Fertiliser (Inorganic, Organic or Mixed) (Control) Order, 1985, fall under heading 3101 as fertilisers and are covered by S. No. 237 of Schedule I. An explanation has been inserted in that entry to make this clear. Products that are not registered under Schedule VI do not get the benefit of this clarification and must be classified on their own facts. Past cases for registered products are also regularised on an "as is where is" basis.
What GST practitioners should check now
The 57th Council meeting had recommended all four points, and the PIB release of 8 October 2026 listed them under the recommendations relating to goods. Circular 265 is the instrument that binds field officers. It came along with Circular No. 266/12/2026-GST of the same date on service-side issues, including the taxability of NBFC services to banks under co-lending arrangements and the value of recoveries in motor vehicle leasing.
For used car dealers, the first return in which the newly allowed credit can be taken is the October 2026 GSTR-3B, due on 20 November 2026 for monthly filers. Dealers should reconcile the eligible service and input invoices in GSTR-2B, separate them from vehicle purchase invoices, and keep the circular on file for audit. Pending appeals and replies to notices on this issue should be updated to cite paragraph 3.2. Paragraph 6 of the circular asks officers to report any difficulty in implementation to the Board, so further instructions remain possible if field formations raise questions on mixed-use credit.
Official source: View the official source document
