Amendment in Section 17(5) – ITC basket gets bigger!

CA Swati Kharkia

The CGST Act, 2017 has been amended for the first time since the implementation of GST in India vide the CGST (Amendment) Act, 2018. Although the amendments were brought in the public domain in 2018, they have been made effective only from 1^st February 2019.

One of the most important sections which has been amended is Sub-section 5 of Section 17 of the CGST Act, 2017, which blocks the Input Tax Credit (ITC) on the supply of certain specified goods and services. In this article, we shall discuss only those clauses of Section 17(5) which have been amended vide the CGST (Amendment) Act, 2018.

The first clause which has been amended in Section 17(5) is clause (a). The amended clause (a) reads as follows:

“(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:—

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;

(aa) vessels and aircraft except when they are used––

(i) for making the following taxable supplies, namely:—

(A) further supply of such vessels or aircraft; or

(B) transportation of passengers; or

(C) imparting training on navigating such vessels; or

(D) imparting training on flying such aircraft;

(ii) for transportation of goods;”

On a plain reading of this clause, it is amply clear that the scope of ITC on motor vehicles has been widened. The erstwhile clause (a) blocked ITC on all kinds of motor vehicles subject to the exceptions given therein. However, the amendment now allows ITC in respect of motor vehicles having approved seating capacity of more than thirteen passengers. The importance of the word “approved” is very significant in this clause. This means that only such vehicles which have been registered under the Motor Vehicles Act, 1988 with a seating capacity of upto thirteen persons, shall be covered under the ambit of this section and ITC shall be disallowed. Therefore, a motor vehicle owner cannot suo-moto, introduce an additional seat to his existing thirteen seater vehicle without amending the registration of his vehicle, just to avail the benefit of ITC as per this clause.

Further, the confusion regarding ITC availability on special purpose vehicles such as dumpers, work-trucks, fork-lift trucks, etc. also gets settled with this amendment, since this clause restricts ITC of only such motor vehicles which are used for transportation of passengers. Therefore, all types of vehicles used for transportation of goods are allowed to avail ITC without any restrictions under this sub-section.

The next important amendment which has been brought in Section 17(5) is the introduction of clause (ab). Clause (ab) of Section 17(5) reads as follows:

“(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

Provided that the input tax credit in respect of such services shall be available—

(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

(ii) where received by a taxable person engaged—

(I) in the manufacture of such motor vehicles, vessels or aircraft; or

(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;” 

This clause has been inserted to restrict ITC on the supply of services of general insurance, servicing, repair and maintenance in respect of those motor vehicles, vessels or aircraft on which ITC is not available as per clauses (a) and (aa). Therefore, if supply of insurance service is provided in relation to a motor vehicle on which ITC is blocked as per clause (a) or clause (aa), ITC shall not be available even to the provider of insurance service of such motor vehicle. The same applies even in case of supply of servicing and repair and maintenance service of motor vehicles, vessels or aircraft.

The next amendment in Section 17(5) has been brought in clause (b). The amended clause (b) is extracted below:

“(b) the following supply of goods or services or both—

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.” 

The highlighted words have been newly inserted in this clause in substitution of the phrase ‘rent-a-cab’. This seems to have been done because of the fact that rent-a-cab has not been defined under the CGST/IGST Act. Vide the amendment, ‘rent-a-cab’ has been substituted with the words ‘leasing, renting and hiring of motor vehicles, vessels or aircraft’ thereby clarifying the nature of renting services of motor vehicles, vessels or aircraft on which ITC shall not be available.

On an analysis of the aforesaid amendments, two interesting facets can be identified:

• Prior to these amendments, there was a lot of confusion regarding the eligibility to avail ITC on the supply of such services which were provided in relation to those motor vehicles, vessels or aircraft on which ITC remained blocked. The amended clause (ab) and clause (b) clarifies this issue and now, only such services which are covered within the ambit of these two clauses shall be considered to be ineligible for availing ITC.
• A nexus has been drawn in the clauses ‘(ab) and (b)’ to clauses ‘(a) and (aa)’. These clauses have been wonderfully linked to state that only such motor vehicles, vessels or aircraft on which ITC is not available in accordance with clause (a) and (aa), shall be ineligible to avail ITC under clause (ab) and (b). For instance, a supplier of repair or maintenance service for a motor vehicle can avail ITC only if ITC on such motor vehicle is available in terms of clause (a) or clause (aa).

The amendments carried out under Section 17(5) and the scope of ITC availability as per the above discussion, can be summarized as below:

Clause	Nature of supply	ITC availability
Clause (a)	Motor vehicles used for transportation of persons, having an approved seating capacity upto thirteen persons (including the driver)	ITC disallowed subject to the exceptions specified under this clause
	Motor vehicles used for transportation of persons, having an approved seating capacity of more than thirteen persons (including the driver)	ITC allowed without any condition
	Motor vehicles used for transportation of goods	ITC allowed without any condition
Clause (aa)	Vessels or aircraft	ITC disallowed subject to the exceptions under this clause
Clause (ab)	Services of general insurance, servicing, repair and maintenance of motor vehicles, vessels or aircraft	ITC disallowed only with respect to such motor vehicles, vessels or aircraft on which ITC is disallowed as per clause (a) and clause (aa)
Clause (b)	Services of leasing, renting or hiring of motor vehicles, vessels or aircraft	ITC disallowed only with respect to such motor vehicles, vessels or aircraft on which ITC is disallowed as per clause (a) and clause (aa)

Undoubtedly, the scope of ITC has been widened through this amendment, however, there still remains certain loose ends on which further clarity is required. One such issue is – where the employer provides transportation facilities to its employees, will such supply get covered under section 17(5) as a supply of ‘transportation of persons’ and ITC shall be disallowed, or will it come out of this section considering the same as a ‘facilitation service’ thereby allowing ITC.

In spite of the amendments, such questions remain unanswered and the Government needs to issue certain clarifications to further clarify such issues.

To conclude, it can be said that these amendments have removes a large chunk of confusion which was prevailing in the industry regarding the scope of ITC availability in respect of motor vehicles, vessels or aircraft and the related services. In view of this, lesser litigations and advance rulings are expected henceforth.

Disclaimer: The views expressed in this article are strictly personal.