Usually motor vehicles are used by persons registered under GST law in the course of the business. However input tax credit (ITC) on passenger transportation motor vehicle is generally blocked under Section 17(5) of the CGST Act subject to some exceptions. For more details in regard to ITC on motor vehicle click here. Interesting set of questions about GST implications on sale of such vehicles as scrap is generally asked by the tax payers. First question being whether such sale will be regarded as supply as a business entity is not involved in sale of vehicles on daily business. Secondly, if sale is considered as supply which rate of tax will apply viz rate of vehicles or rate of scrap.
In regard to above issues we can fall back on the ruling of Maharashtra AAR in the case of CMS Info Systems Limited wherein it was ruled that supply of motor vehicles as scrap after its usage will be treated as ‘supply’ in the course or furtherance of business and that GST would be applicable on such transaction.
Facts of the case:
- The applicant, CMS Info Systems Limited, provides cash management services in India. it is engaged in managing cash circulation through transporting cash from currency chests to bank branches.
- The transportation is facilitated using security vans popularly known as cash carry vans. The applicant purchases raw motor vehicles and gets it converted into cash carry vans. The applicant pays GST on fabrication as well as on purchase of such motor vehicles.
- The credit of such GST is not availed. In the pre-GST era, the applicant had paid Central Excise Duty and Value Added Tax. when the vans cannot be used further, the applicant sells these motor vehicles as scrap.
Issue on which ruling was sought:
The issue sought for clarification before the Authority which is also relevant for us in context of the article is whether the supply / sale of motor vehicles as scrap after its usage can be treated as ‘supply’ in the course or furtherance of business and whether such transaction would attract GST. If yes what would be the rate of GST / compensation cess applicable.
Order of Maharashtra AAR: Deliberations and Ruling
The Authority comprising of Members B.V. Borhade and Pankaj Kumar found that the disposal of cash-carrying vans is a transaction in connection with or incidental or ancillary to the business of having a cash management network. “As and when the vehicles become scrap, they have to be disposed off and the proceeds therefrom to be identified as income for the business which is reflected in the Profit & Loss Account of the business.
Buying new assets and discarding the old and unusable assets is an activity in the course of carrying on of the business. Hence we conclude that supply of such motor vehicles as scrap after its usage is an activity of ‘supply’ in the course or furtherance of business and such transaction would attract GST.” observed the members.
As regard GST rate applicable , AAR stated that Chapter 87 of the Customs Tariff covers motor vehicles. The applicant has not informed the Customs/Excise Tariff Heading. Neither has any copy of the invoice effecting the supply been tendered. The applicant has submitted a sample agreement copy which it enters into while delivering services of cash management. However, the same throws no light on the type of the motor vehicles to be used. Further, whether the vehicles are sold as scrap and unusable OR sold as old vehicles is not found confirmed from any document. It is generally seen that there is surrender of the RTO Registration Book when the vehicles are disposed off as scrap. Hence, it needs to be ascertained as to whether the vehicles are sold as scrap. For vehicles sold as scrap which does not amount to sale of a vehicle as such, the rate of the material sold as scrap would apply.
For vehicles sold as vehicles, a perusal of the notifications issued for the purposes of the GST Act reflects thus –
1. Notification No. 2/2017-Central/State Tax (Rate) – (as amended from time to time) enlisting the goods exempted from GST does not cover the impugned cash carrying vans.
2. Notification No. 1/2017-Central / State Tax (Rate)(as amended from time to time) enlisting the goods taxable to GST at various rates ‑
a. Schedules I to III and V to VI do not cover the impugned goods.
b. Entries in Schedule IV would cover the impugned goods.
3. Notification No. 1/2017-Compensation Cess (Rate) (as amended from time to time) enlisting the goods taxable to Compensation Cess under the Goods and Services Tax (Compensation to States) Act, 2017 at various rates ‑a. This Notification enlists goods from the Chapter 87.
In absence of the requisite details before us, we have to ask the applicant to go through the Notification No. 1/2017-Central / State Tax (Rate) and Notification No. 1/2017-Compensation Cess (Rate), as amended from time to time.
Also Read: All about GST on sale of old and used motor vehicles
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
