Section 17 Sub-Section 5 of CGST Act has made it clear that even though a Vehicle is used in business, still Tax-Payer will not be entitled to claim Input Tax Credit (ITC) on purchase or hiring of the same. Before 01-02-2019, Tax Payers were restricted from availing ITC on purchase of all type of Motor Vehicle. CGST (Amendment) Act, 2018 which came into effect from 01-02-2019, has substituted the clause and relaxed Tax Payers to avail ITC on the purchase or hiring on some type of Motor Vehicle. But CGST (Amendment) Act, 2018 has also made the provision complicated, which on plain reading is difficult to understand.
Further, CBEC vide notification no. 22/2019 dated 30th Sep 2019 has brought renting of motor vehicle services under Reverse Charge Mechanism (RCM). In this article, you will find everything about ITC and RCM applicability for motor vehicles in a simple summarised way.
(Note:- Please turn on Desktop Mode for better visuals)
Before summarising provision it is essential to understand the Definition of Motor Vehicle for which we need to refer to Motor Vehicles Act, 1988 – Motor Vehicle means any mechanically propelled vehicle adapted for use upon roads but does not include
1) Vehicle running upon fixed rails or
2) Vehicle of a special type adapted for use only in a factory or
3) Vehicle having less than four wheels fitted with an engine capacity of not exceeding 35CC
Section 17(5) A, AB:- ITC is not available for
Clause A – Motor vehicles used to transport persons, having a seating capacity of less than or equal to 13 persons (including the driver). AND
Clause AB. Services of general insurance, servicing, repair and maintenance of aforesaid motor vehicles.
Provided that ITC would be available in the following case:-
(a) When vehicles or vessels or aircraft are used for transportation of goods.
(b) Further Supply of such vehicles or vessels or aircraft, respectively. [i.e. Tax Payer is in the business of supplying cars]
(c) Transportation of passengers [i.e. Tax Payer is providing Passenger Transportation Service].
(d) Imparting training on driving, flying, navigating such vehicle or vessels or aircraft, respectively.
Section 17(5)b states that ITC will not be available in case of renting or hiring of vehicles as referred to in clause A of section 17(5) (<=13 seater Vehicles).
Provided that ITC would be available if it is obligatory for an employer to provide the above service to its employees under any law.
(E.g. Delhi Govt has made compulsory for the companies to provide Pick and Drop Service to female employees working in Night Shift. In such case, ITC would be available in case of hiring as Companies are obliged by law to provide such service.)
In Nutshell, Even if Tax Payer Purchase or Hiring or Maintenance of a vehicle below or equal sitting capacity of 13, he will not be eligible to claim ITC (except when used for the specified purpose). But ITC can be availed for Purchase & Hiring & Maintenance motor vehicle having Seating Capacity exceeding 13.
GST on hiring of a motor vehicle designed to carry passengers is to be paid by Recipient on RCM @ 5% subject to certain conditions:-
(a) Supplier is other than a body corporate; and
(b) Supplier does not issue an invoice charging GST @12% from the service recipient; and
(c) Recipient of the service is a body corporate.
(d) Cost of Fuel is included in the overall Cost of Hiring a motor vehicle.
1) In case you purchase a motor vehicle, you will be eligible to avail ITC only if it used for the specified purpose or has an approved seating capacity of more than 13.
2) In case you hire a motor vehicle, you are required to charge RCM subject to fulfilment of other conditions and will only be eligible to claim ITC only if it used for the specified purpose or has an approved seating capacity of more than 13.