ITC can be claimed on goods transport vehicle and passenger transport vehicle (having approved seating capacity of more than 13 persons (including driver)) without any exceptions. However for rest of the passenger transport vehicle like Cars, Motor cycle etc, ITC is not admissible except in situations listed out in Section 17(5) of the CGST Act which are discussed in this article.
Input Tax Credit is considered to be life line of Goods & Services Tax (GST) and makes GST a value added tax as effectively tax is levied on value added at each stage. This eliminates cascading of taxes which effectively reduce the prices goods and services and burden on ultimate consumers. However despite the principle of seamless flow credits embedded in GST, input tax credit (ITC) has specifically been debarred in respect of certain inward supplies of goods or services as per Section 17(5) of the CGST Act,2017 which inter alia blocks the ITC in regard to motor vehicles with some exceptions.
The blocked credits stated in Section 17(5) are not available to the tax payers even if they are used for purposes of business and for providing taxable supplies of goods or services.
Statutory provisions regarding blocked credit on motor vehicles:
The provisions of Section 17(5) in regard to motor vehicles are summarized below for ready reference.
| Clause of Section 17(5) | Blocked Credit | When ITC is available and not blocked | Remarks |
| (a), b(i))& (ab) | Motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including the driver) including leasing, renting or hiring thereof. Services of general insurance, servicing, repair and maintenance of aforesaid motor vehicles | ITC of motor vehicles, leasing, renting or hiring thereof as well as insurance, servicing, repair and maintenance thereon will not be blocked when such motor vehicles are used for: i) further supply of such vehicles or ii) transportation of passengers or iii) imparting training on driving of such motor vehicles. Apart from above ITC will be admissible for leasing, renting or hiring of motor vehicles when: i) these are used for making an outward supply of same category of goods or services or both or as element of a taxable composite of mixed supply. ii) it is obligatory for an employer to provide the same to its employees under any law for the time being in force. Note: Motor Vehicle will include motor cycles / scooters exceeding 25 CC and thus their ITC will also be blocked unless above conditions are fulfilled. | ITC would be admissible in cases of motor vehicles for transportation of goods without these restrictions. ITC of general Insurance, servicing and repair and maintenance of motor vehicles which is otherwise blocked will be allowed where: i) the recipient is engaged in the manufacture of such motor vehicles i.e. ITC on repair charges charged by service dealers on free services given to consumers will be admissible to the car manufacturer. ii) in the supply of general insurance services in respect of such motor vehicles insured by him i.e. ITC on reinsurance premium is not blocked. |
Frequently Asked Questions (FAQs) on Input tax credit on Motor Vehicles:
After you have gone through the above table thoroughly, its time to reinforce our knowledge with the help of help of the following FAQs.
Q.1: I am a GST registered person engaged in trading of goods. I have bought a Car for business use. Will I be able to get Input Tax Credit on the GST paid on purchase of the Car.
Ans: No, ITC cannot be availed as same is blocked under Section 17(5) and you do not fall in any of the exceptions as laid down in said Section as tabulated above. Further in such a situation you will also not be able to avail input tax credit in regard to GST paid on Services of general insurance, servicing, repair and maintenance of said Car.
Q.2: I am a GST registered person engaged in manufacture of goods. I have bought a Bus for transportation of employees to factory. Will I be able to get Input Tax Credit on the GST paid on purchase of the Bus.
Ans: Yes, ITC cannot be availed as credit is blocked only in regard to passenger vehicles having seating capacity of not more than 13 persons (including driver). As bus will have seating capacity above this limit the credit thereon is not blocked under Section 17(5). Further in such a situation you will also be able to avail input tax credit in regard to GST paid on Services of general insurance, servicing, repair and maintenance of said Bus.
Q.3: I am a GST registered person engaged in trading of goods. I have bought a Truck for use in business for transportation of goods. Will I be able to get Input Tax Credit on the GST paid on purchase of the Car.
Ans: Yes, ITC can be availed as credit of only passenger vehicle is blocked under Section 17(5). Further in such a situation you will also be able to avail input tax credit in regard to GST paid on Services of general insurance, servicing, repair and maintenance of said Truck.
Q.4: I am a GST registered person engaged in supply of consultancy services. I have bought a Motor Cycle for business use. Will I be able to get Input Tax Credit on the GST paid on purchase of the Motor Cycle.
Ans: No, ITC cannot be availed as same is blocked under Section 17(5) and you do not fall in any of the exceptions as laid down in said Section as tabulated above.It is important to note here that only the vehicles having less than four wheels which are fitted with engine capacity of upto 25 CC are not motor vehicles as per Motor Vehicle Act and as Motor Cycle are normally of 100 CC and above they would squarely be covered under the expression Motor vehicle and thus input tax credit thereon is blocked subject to exceptions laid down under Section 17(5). Further in case the credit on motor cycle is blocked you will also not be able to avail input tax credit in regard to GST paid on Services of general insurance, servicing, repair and maintenance of said Motor Cycle.
Q.5: I am a GST registered person. I have bought a Car for business use. Under what situations I will be able to get Input Tax Credit on the GST paid on purchase of the Car.
Ans: Input Tax Credit can be availed when such Car is used for:
- further supply of such vehicles (E.g: Purchase of Car by Car dealer for further supply) or
- transportation of passengers (E.g: Purchase of Car for transportation of passenger e.g. Radio Taxi) or
- imparting training on driving of such motor vehicles (E.g : purchase of cars by car driving school).
Q.6: I am a GST registered person engaged in renting of motor vehicles. I have bought a Car for business use. Whether I can avail Input Tax Credit of GST paid on purchase of Car.
No, ITC cannot be availed as you are engaged in renting of motor vehicles which is not included in the exceptions mandated under Section 17(5) of the CGST Act. It is important to note here that exception exists in regard to transportation of passengers and not in regard to renting of motor vehicles and both the terms have different connotations. Needless to mention that in case the credit on Car is blocked you will also not be able to avail input tax credit in regard to GST paid on Services of general insurance, servicing, repair and maintenance of said Motor Cycle.
Q.7: I am a GST registered person. I have bought a Car for business use. Under what situations I will be able to get Input Tax Credit on the GST paid on Services of general insurance, servicing, repair and maintenance of said Car.
Ans: Input Tax Credit can be availed in respect of car insurance , servicing and repaid and maintenance when such Car is used for:
- further supply of such vehicles or
- transportation of passengers
- imparting training on driving of such motor vehicles.
However even in cases above conditions are not fulfilled, still ITC of general Insurance, servicing and repair and maintenance of motor vehicles will be allowed where:
i) the recipient is engaged in the manufacture of such motor vehicles. E.g: ITC on repair charges charged by service dealers on free services given to consumers will be admissible to the car manufacturer.
ii) in the supply of general insurance services in respect of such motor vehicles insured by him. E.g: ITC on reinsurance premium paid by insurance company to another insurance company is not blocked.
Q.8: Whether GST paid on cars provided to their different customers on lease rent will be available as Input Tax Credit (ITC) in terms of Section 17(5) of Central Goods and Service Tax Act, 2017.
Ans: It has been held by Madhya Pradesh AAR in the case of Narsingh Transport [2019] 104 taxmann.com 86 (AAR – MADHYA PRADESH) that the applicant is entitled to avail ITC on cars (passenger vehicles) which are further supplied to customers on lease rent, subject to condition applicable in such supply of services as per notification number 11/2017-Central Tax (Rate) Dated 28.06.17 as amended from time to time and corresponding notifications issued under MPGST Act.
At the termination of lease agreement/contract, if the vehicle is not further leased to same or other customer, the applicant shall be liable to reverse the ITC so availed as per law. Such vehicles should abide by the norms and regulations of The Motor Vehicle Act. in accordance to be registered for commercial use with the Transport authority and not put to own use by the Applicant.
The judgement is in stark contrast to Judgement of West Bengal AAR in the matter of Mohana Ghosh [2019] 106 taxmann.com 108 (AAR-WEST BENGAL) dated 10th June 2019 which provided that provisions of Section 17(5) restrict ITC in case of renting of Cars. In our view Input Tax Credit in respect of supplying motor vehicles on rent should be available as same is nothing but further supply of vehicles and should have same treatment as in case of selling the motor vehicles.
Q.9: I am a GST registered person. I have taken a Car on hire for business use. Under what situations I will be able to get Input Tax Credit on the GST paid on hire charges of the Car.
Ans: Input Tax Credit can be availed when such Car is used for:
- transportation of passengers or
- imparting training on driving of such motor vehicles.
- these are used for making an outward supply of same category of goods or services or both or as element of a taxable composite of mixed supply. Example: A vehicle is taken on hire and further given on hire to another person.
- it is obligatory for an employer to provide the same to its employees under any law for the time being in force. Though legally this is one of the exception, but in my view there is no such law wherein it is obligatory for an employer to provide Car to the employee.
Q.10: I am a GST registered person engaged in trading of goods. I have taken a Car on hire for business use. Will I be able to get Input Tax Credit on the GST paid on hiring of the Car?
Ans: No, ITC cannot be availed as same is blocked under Section 17(5) and you do not fall in any of the exceptions as laid down in said Section as stated in preceding question.
Q.11: I am a GST registered person engaged in renting of motor vehicles. I have taken a Car on hire for further renting. Will I be able to get Input Tax Credit on the GST paid on hiring of the Car?
Ans: Yes, You would be eligible to avail ITC as these services are used for making an outward supply of same category of services viz renting of motor vehicles. It is important to note here that such a credit is eligible only if motor vehicle is taken on rent and further given on rent. As in case you purchase motor vehicle and give the same for renting, you will not be eligible to avail ITC as same is admissible only in three situations which does not cover renting of motor vehicle and rather only covers transportation of passengers which a different ball game altogether.
Q. 12: Whether an employer / contractor can avail ITC on hiring of commercially licensed vehicles for transportation of its employees.
Himachal Pradesh Authority for Advance Ruling (AAR) in its ruling in case of Prasar Bharti Broadcasting Corporation of India has adjudged that that no ITC will be available in respect of renting of taxis used for transportation for employees, which is not obligatory under any law, for the time being in force. Read More
Q.13: Whether Car Dealers are eligible for ITC on Demo Cars / vehicles
It has been held by Maharashtra AAR in the case of Chowgule Industries Private Limited, that the car dealer is entitled to avail Input tax credit (ITC) charged on inward supply of Motor Vehicle which is used for Demonstration purpose in the course of business of supply of Motor Vehicle as an input tax credit (ITC) on capital goods and the same can be utilized for payment of output tax payable under this Act.
However when such demo cars will be sold, Section 18(6) of the CGST Act will be applicable and the car dealer shall pay an amount equal to the ITC taken on the said Demo Vehicles reduced in the manner provided under Rule 44 of the CGST Rules, 2017 ( ITC involved in the remaining useful life in months shall be computed on pro rata basis taking useful life as five years) or the tax on the transaction value of such Demo Vehicles, whichever is higher.
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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.
