ITC or Income Tax Benefits on Cars/EVs for Office Use: Can You Claim?

Background

In today’s evolving business landscape, professionals and entrepreneurs are increasingly opting to purchase vehicles—especially electric vehicles (EVs)—for official use, aiming to enhance mobility, project a corporate image, and reduce environmental impact. With the government actively promoting e-mobility and sustainable business practices, many assume these purchases offer lucrative tax benefits. But can a business really claim Input Tax Credit (ITC) on such vehicles under GST? Are there income tax deductions available, especially for EVs? This article cuts through the confusion by decoding the legal provisions, circulars, and case laws, offering clarity on what’s allowed—and what’s not—when it comes to business vehicles.

1. GST Implications on Car Purchase – Input Tax Credit (ITC)

1.1 Relevant Provision: Section 17(5) of the CGST Act, 2017

Under Section 17(5) of the Central Goods and Services Tax Act, 2017, certain blocked credits are listed. Clause (a) of this subsection specifically deals with motor vehicles.

Section 17(5)(a): Input tax credit shall not be available in respect of 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:

(i) further supply of such motor vehicles;
(ii) transportation of passengers; or
(iii) imparting training on driving such motor vehicles.

1.2 Interpretation and Application

Thus, if a car is purchased for general office use, ITC on GST paid is not allowed as it falls under blocked credit unless the use falls under any of the three exceptions listed above. For instance, a chartered accountant or consultant purchasing a car to visit clients cannot claim ITC, as such use does not qualify under any of the allowed purposes.

2. Income Tax Implications – Depreciation and Business Expense

2.1 Ownership and Usage Condition

Under the Income Tax Act, 1961, capital expenditure on a car used for business purposes is not directly deductible, but depreciation can be claimed under Section 32 if the following conditions are met:

• The car is owned by the assessee.
• The car is used for the purpose of business or profession.

2.2 Section 32 – Depreciation Allowance

As per the Income Tax Rules, depreciation is allowed at:

• 15% per annum on motor cars (other than those used in a business of running them on hire).
• 30% if the car is used in the business of running them on hire (Rule 5 of the Income Tax Rules, read with Appendix I).

2.3 Personal vs Business Use – Apportionment Required

If the car is used for both personal and business purposes, only the proportion attributable to business can be considered for depreciation and running expenses.

• Section 37(1) allows revenue expenses such as fuel, insurance, repairs, etc., provided they are incurred wholly and exclusively for the business.
• It is advisable to maintain logbooks to substantiate the business use.

Tax Benefits on Purchase of Electric Vehicles (EVs) for Office Use

1. GST Implications – Input Tax Credit on Electric Vehicles

1.1 ITC on EVs under Section 17(5) of CGST Act, 2017

Electric Vehicles (EVs) are still classified as motor vehicles under GST law.

• Hence, Section 17(5)(a) of the CGST Act continues to block ITC on EVs if they are used for transportation of persons and do not qualify under the exceptions, namely:
  • Further supply (i.e., sale) of such vehicles,
  • Transportation of passengers, or
  • Imparting driving training.

Conclusion: ITC is NOT allowed on electric cars used for office/admin/staff travel purposes unless used in the above-exempt categories.

1.2 GST Rate on EVs – Notification No. 12/2019-Central Tax (Rate) dated 31st July 2019

• GST rate on electric vehicles (EVs) was reduced from 12% to 5% (for both two-wheelers and four-wheelers) w.e.f. 1st August 2019.
• This rate cut was made via:
  Notification No. 12/2019-Central Tax (Rate)
  Matching Integrated Tax Rate: Notification No. 12/2019-Integrated Tax (Rate)

Conclusion: While ITC is blocked, the lower GST rate (5%) eases the upfront cost burden.

Note : Get orginal notification e-copy

2. Depreciation Under Income Tax – Section 32

If the EV is purchased and used for business purposes, depreciation can be claimed as per standard provisions under Section 32 of the Income Tax Act.

2.1 Higher Depreciation for EVs?

• There is no separate depreciation rate for EVs in the Income Tax Rules currently.
• EVs fall under the general category of motor cars, which allows:
  • 15% (normal motor vehicle)
  • 30% (if used in the business of running on hire)

GST Q&A on Purchase of Cars / EVs for Business Use

Q1: Can a registered business claim Input Tax Credit (ITC) on the purchase of a car for office use?

A: No, as per Section 17(5)(a) of the CGST Act, 2017, ITC on motor vehicles for transportation of persons is blocked unless the vehicle is:

• Used for further supply (i.e., resale) of such vehicles,
• Used for passenger transport (e.g., taxi),
• Used for training on driving such vehicles.

Q2: Does this restriction apply even if the car is used only for business purposes (e.g., by the Managing Director for client meetings)?

A: Yes, even if exclusively used for business, ITC is still not available unless it falls under the exceptions mentioned in Section 17(5)(a).

Q3: Does the restriction apply to electric vehicles (EVs) also?

A: Yes, the restriction applies equally to electric vehicles, since they are also “motor vehicles for transportation of persons”. Unless the EV is used for:

• Resale,
• Passenger transport,
• Driving school,

ITC is not allowed.

Q4: What is the GST rate applicable on electric cars?

A:  As per Notification No. 12/2019-Central Tax (Rate) dated 31.07.2019, the GST rate on electric vehicles was reduced from 12% to 5%, effective from 01.08.2019.

Q5: Can GST ITC be claimed on a commercial vehicle (e.g., truck or goods carrier)?

A: Yes, ITC is allowed on motor vehicles used for transportation of goods, as the restriction under Section 17(5)(a) applies only to vehicles used for transporting persons.

Q6: Can GST ITC be claimed on motor cars used by driving schools for training?

A:  Yes, ITC is available if the vehicle is used to provide training on driving such vehicles, as this is a specific exception under Section 17(5)(a)(iii).

Q7: Can a car dealer or leasing company claim ITC on cars purchased for stock or lease?

A: Yes, if the registered person is engaged in:

• Further supply of such vehicles (e.g., car dealers), or
• Leasing or renting vehicles,

ITC is allowed under the exception in Section 17(5)(a)(A).

Q8: What documents are required to support ITC claim (where applicable)?

A: The following are essential:

• Valid Tax Invoice issued by a registered supplier,
• Receipt of goods,
• Supplier must have filed GSTR-1 and tax must reflect in recipient’s GSTR-2B,
• ITC must be claimed within time limits under Section 16(4).

Q9: Is ITC available on insurance, repairs, and maintenance of the car?

A:  ITC on insurance, servicing, repairs, or maintenance of motor vehicles is also blocked under Section 17(5)(ab) unless the underlying vehicle qualifies for ITC.

So, if ITC is not available on the car, it is also not available on its maintenance.