In this article we will analyse Input tax credit on motor vehicles post 01-02-2019 GST amendment.
Motor Vehicles are used for transportation of goods or passengers/ employees in the business. Under GST, Input tax credit is not restricted for motor vehicles made and used for transportation of goods. However, input tax credit was restricted on certain type of passenger motor vehicles even though they may be used in the course or furtherance of business.
Let us initially try to understand the meaning of the phrase ‘motor vehicle’
Motor Vehicle
The term motor vehicle has been defined under section 2(76) of the GST Act as
| “Motor Vehicle” shall have the same meaning as assigned to it in clause (28) of Section 2 of the Motor Vehicles Act, 1988 (59 of 1988) |
Section 2(28) of the Motor Vehicles Act, 1988 defined ‘motor vehicle’ as under:
| ‘motor vehicle’ or ‘vehicle’ means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding [twenty-five cubic centimetres ]; |
From the above definition, motor vehicle refers to
a) Mechanically propelled vehicles which are made for use on roads
b) Motor Vehicle definition excludes from its ambit
(i) vehicles running on fixed rails eg. Train, tram, metro etc.,
(ii) special type of vehicles that is used only in factory or enclosed premises
(iii) vehicle having less than 4 wheels with engine capacity not exceeding 25CC
Now let us look into the input tax credit restrictions and exceptions on passenger motor vehicles provided under Section 17(5)(a), Section 17(5)(ab) and Section 17(5)(b) which are tabulated as under for quick reference
Interpretation of Statutory Provisions (Post 01/02/2019)
| Particulars | Input Tax Credit Restrictions | Exceptions to Input Tax Credit Restrictions |
| Section 17(5)(a) | Input tax credit is blocked/ restricted on passenger motor vehicle purchases having approved seating capacity up to 13 persons | – No ITC restrictions for motor vehicles with passenger capacity above 13 passengers (including driver)
– No ITC restrictions when passenger vehicles with below 13 passenger capacity (including driver) was used for a) further supply of such motor vehicles b) transportation of passengers c) imparting training or driving of such motor vehicles |
| Section 17(5)(ab) | Input tax credit would not be available on certain expenses relating to motor vehicles viz. general insurance, servicing, repairs and maintenance in relation to motor vehicles having approved seating capacity up to 13 persons. | – No ITC restrictions for motor vehicles with passenger capacity above 13 passengers (including driver)
– Section 17(5)(ab) restrictions is applicable from 01/02/2019 and no ITC restrictions during 01/07/2017 to 31/01/2019 – Section 17(5)(ab) disallowance is exhaustive and restricted to general insurance, servicing, repairs and maintenance. No ITC restrictions for any other expenses in respect of motor vehicles e.g. car parking – No ITC restrictions when passenger vehicles with below 13 passenger capacity (including driver) was used for a) further supply of such motor vehicles b) transportation of passengers c) imparting training or driving of such motor vehicles – No ITC restrictions on services of general insurance, servicing, repairs and maintenance when such services are received by taxable person engaged – a. in the manufacture of motor vehicles b. in supply of general insurance services in respect of motor vehicles |
| Section 17(5)(b) | Input tax credit on renting/ leasing/ hiring of motor vehicles would be disallowed in relation to passenger motor vehicles having approved seating capacity up to 13 persons | – No ITC restrictions for motor vehicles with passenger capacity above 13 passengers (including driver)
– No ITC restrictions when passenger vehicles with below 13 passenger capacity (including driver) was used for a) further supply of such motor vehicles b) transportation of passengers c) imparting training or driving of such motor vehicles – No ITC restrictions when renting/ leasing/ hiring of motor vehicles are provided by employer to the employee as statutory obligation i.e. under any law for time being in force in India. |
Other points to ponder over:
> For input tax credit, actual usage of motor vehicle is not relevant, the point of relevance is only the purpose for which motor vehicle has been designed or approved by authorities. If motor vehicle designed for passenger transport is used for goods transport, then ITC would be blocked provided seating capacity is below 13 persons.
> For determining seating capacity restrictions of motor vehicles, the approved seating capacity of Regional Transport Authority is relevant but not the actual number of persons seating.
> For availment of input tax under transportation of passengers, the vehicles must be registered as a passenger transport vehicle with the State Transport Department.
> Renting of Motor Vehicles vs. Passenger Transport– Under Section 17(5) ITC restrictions were imposed on renting of motor vehicles but not on passenger transport vehicles. In CBIC Circular No. 177/09/2022- TRU dated 03.08.2022 has clearly made distinction between renting of motor vehicles and passenger transport vehicles. It was clarified in the said circular that under renting of motor vehicles the hirer defines when vehicle should be operated, determines schedule, routes and other operational considerations. Whereas Passenger transport vehicles are operated under pre-determined routes and pre-determined schedules.
With this brief background on input tax credit restrictions on passenger motor vehicles let us try to understand the same with examples
A. Blockage of Input Tax Credit on Purchase of Passenger Motor Vehicle:
M/s. ABC Ltd engaged in manufacture of computers has purchased 10 Maruti swift Cars for captive use and paid GST amount of Rs. 18 lakhs on the said purchase. Whether M/s. ABC Ltd is entitled to avail input tax credit on said purchase if 10 Maruti Swift cars were used for transportation of their employees?
| As per Section 17(5)(a) of the GST Act, Input tax credit has not been allowed on purchase of motor vehicles for transport of persons, having approved capacity of not more than 13 persons (including driver). |
In the above example the motor vehicle purchased by M/s. ABC Ltd have an approved seating capacity below thirteen persons (including the driver), hence in this case the M/s. ABC Ltd will not be eligible for Input Tax Credit.
Demo cars
M/s. AZB Ltd is engaged in the business of supply of automobiles having dealerships of XYZ and ABC motor vehicles. M/s. AZB Ltd is also involved in providing servicing, repair, related auxiliary services with respect to motor vehicles. As part of day-day business, M/s. AZB Ltd requires demo cars for demonstration purpose in the showrooms. The model demo cars are used for demonstration for period of 3 years or 50,000 kms whichever is earlier. Whether M/s. AZB Ltd is entitled to avail input tax credit on purchase of demo cars?
| Demo cars are not received with the intent of ‘further supply of such motor vehicles as such’. Further, Demo cars are not regarded as inputs as they are sold after 12 months. Input tax credit on demo cars cannot be allowed. Reliance in this regard placed in the case of
Khatwani Sales and Services L.L.P (2021) 124 taxmann.com 149 (AAR- Madhya Pradesh) Platinum Motocorp LLP (2022) 138 taxmann.com 344 (AAAR-Haryana); BMW India (P.)Ltd. (2022) 138 taxmann.com 345 (AAAR-Haryana) |
Purchase of motor vehicle for further supply of ‘renting/hiring for transportation of passengers’:
M/s. SZB Transport Company engaged in car rental business has purchased 15 Tata Nexon cars for rental business and paid GST amount of 50 lakhs. Whether M/s. SZB Transport Company is eligible to input tax credit against said purchase of 15 Tata Nexon Cars ?
| As per Section 17(5)(a) input tax credit is allowed on purchase of motor vehicles when used for further supply of such motor vehicles. The phrase ‘supply’ defined under Section 7 of the GST Act is wider enough to cover sale, lease, rental, hiring etc.,
Accordingly, motor vehicle purchased for rental purpose would be allowed for availment of input tax credit. However, the final eligibility of ITC would also depend upon the entry in rate notification. |
B. Blockage of Input Tax Credit- Renting/hiring/leasing of motor vehicle:
Input Tax Credit on Renting of Motor Vehicle with seating capacity more than 13 persons (including the driver)
M/s. XYZ Ltd factory operates 24 hours a day, on four shifts. The factory is located in remote area where public conveyance is not available at all time. M/s. XYZ Ltd provide transportation facilities to its employees in Non-air conditioned bus having approved capacity of more than 13 passengers for commuting to and from factory place through service provider ‘A’. Whether M/s. XYZ Ltd is entitled to avail input tax credit on GST charged by the service provider ‘A’ for hiring of bus ????
| Section 17(5) has been amended by CGST (Amendment) Act, 2018 (No. 31 of 2018) dated 29-8-2018 made effective from 01-02-2019 vide Notification No. 02/2019 – Central tax -2019 dated 29-1-2019.
With effect from 01-02-2019, Input Tax Credit has been allowed on leasing, renting or hiring of motor vehicles, for transportation of persons, having approved seating capacity of more than thirteen persons (including the driver). The reliance in this regard can be placed on following case laws: Tata Motors Ltd. (2020) 41 GSTL 35 (AAR-GST-Mah.) Malbar Cements Ltd (2023) 148 taxmann.com 354 (AAR-Kerala) Maanicare Systems India (P.) Ltd (2022) 137 taxmann.com 136 (AAR-Mah.) YKK India (P.) Ltd (2020) 117 taxmann.com 290 (AAAR-Haryana) Emcure Pharmaceuticals Ltd. (2023) 152 taxmann.com 207 (AAR-Gujarat) |
However, in the above example if the motor vehicle hired by M/s. XYZ Ltd does not have an approved seating capacity of more than thirteen persons (including the driver), then in that case the M/s. XYZ Ltd will not be eligible for Input Tax Credit unless it is obligated under any statute.
Input Tax Credit on Renting of Motor Vehicle with seating capacity less than 13 persons (including the driver)- Statutory requirement.
M/s. ABC Ltd is engaged in rendering IT enabled support services in Health sector, as per mandatory provisions of Shops and Establishment Act 1947 and rules there under it is mandatory for the company to provide transportation facilities to women employees between 8pm to 6 am with adequate protection. In pursuance to the said mandate, M/s. ABC Ltd procured motor vehicles on hire with approved seating capacity of not more than 13 persons (including driver) for transportation of women employees. Whether M/s. ABC Ltd is entitled to avail input tax credit on GST charged by the service providers for hiring of motor vehicles with approved seating capacity of not more than 13 persons (including driver) ????
| Input tax credit has not been allowed on leasing, renting, hiring of motor vehicles for transport of persons, having approved capacity of not more than 13 persons (including driver).
However, as per proviso to Section 17(5)(b), input tax credit in respect of goods or services is available when it is obligatory for an employer to provide the same to its employees under any law for the time being in force. It is also pertinent to note that CBIC vide Circular No. 172/04/2022 dated 06.07.2022 has clarified that the proviso after sub clause (iii) of clause (b) of subsection (5) of Section 17 of the GST Act is applicable to the whole clause (b) of subsection (5) of Section 17 of the GST Act. Therefore, as per Section 17(5)(b) of the GST Act, the Input Tax Credit is not blocked on renting of motor vehicles to provide transport facilities to women employees as it is mandatory for M/s. ABC Ltd to provide the same to its employees under shops and establishment Act. The reliance in this regard is placed in the case of Access Healthcare Services (P.) Ltd. (2023) 155 taxmann.com 48 (AAR-Tamilnadu) |
In other words, if the renting of motor Vehicle with seating capacity less than 13 persons (including the driver) is provided by employer to employee without any statutory obligation then input tax credit is not available to employer on such expenditure. The reliance in this regard is placed in the case of Kirby Building Systems & Structures India (P.) Ltd. (2023) 157 taxmann.com 714 (AAR-Telangana).
Restriction on availment of input tax credit – Employer Recoveries
In Press release dated 10-7-2017, it was clarified that supply by employer to the employees in terms of contractual agreement of employment will not be subject to GST. In department circular No. 172/04/2022 dated 06.07.2022has also clarified that various perquisites provided by the employer to employee as per contractual agreement will not be subject to GST.
In this regard, the employer may recover nominal amounts from employees against various perquisites provided to employees viz. vehicle hire charges/ bus facilities/ canteen facilities etc., Now question arises when employer engages third party service provider to provide vehicle hire/ bus transportation facility/ canteen facilities to its employees. In such scenarios whether employer is entitled to avail full input tax credit on GST paid to third party service providers?
| In Commissioner of Central Excise vs. Ultra Tech Ltd. (2010) 29 STT 244 (Bom.) the Hon’ble Bombay High Court has held that ITC is not admissible to employer on part of cost borne by employee and ITC will be restricted to the extent of cost borne by the employer. Reliance in this regard is also placed in the case of Tata Motors Ltd (2020) 119 taxmann.com 106 (AAR-Maharashtra) |
C. Blockage of Input Tax Credit on ancillary input services such as general insurance, servicing, repairs and maintenance of Motor Vehicles
M/s. XYZ Ltd has purchased motor vehicle with seating capacity less than 13 persons (including the driver. Whether M/s. XYZ is entitled to avail input tax credit on ancillary input services such as general insurance, servicing, repairs and maintenance availed in respect of said motor vehicle ??
| Under section 17(5)(ab), the credit of input services of repair/ insurance/ maintenance used in respect of motor vehicles with seating capacity up to 13 passengers, cannot be allowed. Reliance in this regard can be placed in the cases of
Platinum Motocorp LLP (2022) 138 taxmann.com 344 (AAAR-Haryana); BMW India (P.)Ltd. (2022) 138 taxmann.com 345 (AAAR-Haryana) Moksh Agarbatti (2020) 120 taxmann.com 225 (AAR-Gujarat) |
However, in the above example if the motor vehicle purchased by M/s. XYZ Ltd have an approved seating capacity of more than thirteen persons (including the driver), then in that case the M/s. XYZ Ltd will be eligible for Input Tax Credit on ancillary input services such as insurance, repairs and maintenance of motor vehicle.
(the views expressed in this article are strictly personal and cannot be considered as legal opinion in case of any query. The author of this article can be reached at caprudhvigst@gmail.com)
Author Bio
Your explanation is clear and broad sir, hoping more articles on GST from you.