Goods and Services Tax (“GST”) is the prevalent form of Indirect Tax applicable on the goods and services purchased by consumers in India. Under the regime of GST, Input Tax Credit (“ITC”) is a foundational mechanism provided under the Central Goods and Services Tax Act, 2017 (“CGST Act”) and similar state enactments, for the avoidance of cascading effect of tax.
The term “input tax” refers to the GST levied on any supply of goods and/or services used or intended to be used as an ‘input’ during the course of or in furtherance of business. Similarly, ITC is the credit or reduction of input tax paid by a taxable person from their output tax liability.
Thus, ITC is essentially the set-off of the amount of GST paid on purchases from the amount of GST to be paid on the sales. Thus, at the time of paying tax on output, the output tax liability may be reduced by the ITC, which is the amount of tax already paid on inputs.
The concept of ITC was introduced under the GST regime to provide an uninterrupted inflow of credit at all stages of the business chain. The provision of ITC makes GST a Value-Added Tax, indicating that tax is collected at every stage, after allowing the credit for tax paid at earlier stage.
Section 16 and 17 of the CGST Act stipulates the provisions for the eligibility to avail ITC on supplies of different nature, including those related to Motor Vehicles. This Blog shall discuss and elaborate upon the availability of ITC on supply of Motor Vehicles.
WHAT IS A MOTOR VEHICLE?
Section 2(76) of the CGST Act states that a Motor Vehicle shall have the same meaning as assigned to it under Section 2(28) of the Motor Vehicles Act, 1988 (“MV Act”). According to Section 2(28) of the MV Act, a Motor Vehicle is defined as:
“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 centimeters.”
However, Section 2(28) excludes the following vehicles from the ambit of a Motor Vehicle, namely:
- Vehicle running upon fixed rails, or
- Vehicle of a special type adapted for use only in a factory or any other enclosed premises, or
- Vehicle having less than four wheels fitted with engine capacity of not exceeding 25CC.
CONDITIONS FOR AVAILING ITC
Section 16(2) of the CGST Act necessitates the following conditions to be satisfied by a registered person to avail ITC:
- The person shall have a tax invoice or debit note issued by a registered supplier, or any other document prescribed under the CGST Act or Rules;
- The person has received the goods or services or both;
- GST applicable on such supply has been paid to the Government, either in cash or through the utilisation of ITC available; and
- The person has furnished the applicable returns under the CGST Act and Rules.
The returns of GST under Form GSTR-2A and Form GSTR- 2B shall be mandatory furnished to avail ITC. However, the claim of ITC would only be admissible if the supplier also furnishes the details of a similar statement or debit note in their statement of outward supply as specified in Section 37 of the CGST Act.
Section 17(5) of the CGST Act lays down the following supplies wherein ITC shall not be admissible:
- Motor Vehicles and other modes of transportation, subject to the conditions laid down under Section 17(5)(a);
- Goods and/or services related to:
- Food and drinks, open-air catering, beauty treatment, health services, cosmetic and plastic surgery, unless else specified;
- Rent-a-cab, life insurance, and health insurance, except where an employer is statutorily obligated to provide the service;
- To the extent of their consumption, goods and/or services obtained by a registered person and used for private or particular consumption.
Blocked Credit under GST refers to the supply of certain goods and services on which ITC shall be not available, as provided under Section 17 of the CGST Act. Section 17(5)(a) of the CGST Act blocks the availability of ITC on Motor Vehicles for passenger transportation with an approved seating capacity of not more than thirteen people (including the driver), except when used to make the following taxable supplies:
- Transportation of Passengers
ITC cannot be availed for Motor Vehicles used for passenger transportation if the seating capacity is of not more than 13 people. However, it can be availed if the vehicle has a seating capacity of up to 13 people, including the driver, and is used for:
- Further taxable supply of such Motor Vehicles, or
- Transport of taxable passengers, or
- Imparting training for driving such Motor Vehicles.
- Car Supplier or Dealer
ITC is allowed when the registered person is in the business of making further taxable supplies of such vehicles or conveyances of any kind. Hence, Car Suppliers and dealers are eligible for ITC.
- Transportation of Goods
Motor Vehicles used for the transportation of goods are eligible for ITC. For such Motor Vehicles, ITC on general insurance, servicing, repair, and maintenance of the Vehicle is also permitted.
However, a Goods Transport Agency (“GTA”) cannot claim ITC even though it provides the services of transportation of goods, as the GST applicable for such services are paid by the recipient on reverse charge mechanism.
JUDICIAL PRECEDENTS ON ADMISSIBILITY OF ITC ON DEMO VEHICLES
In the case of Khatwani Sales and Services LLP [Order No. 13/2020 dated 23.07.2022], the Applicant was an authorised KIA dealer, who purchased the Motor Vehicles from the supplier on tax invoices and capitalised the Demo Vehicles in the books of accounts.
The Authority for Advanced Ruling (“AAR”), Madhya Pradesh, observed that in accordance to Section 17(5)(a) of the CGST Act, ITC shall be available in respect of Motor Vehicles that are further supplied as such and used for passenger transportation.
However, the AAR held that Demo Vehicles are not meant for future supply, although such Vehicles were subsequently sold after one or two years. Thus, as the Demo Vehicles did not meet the conditions of Section 17(5)(a) of the CGST Act, the AAR held that ITC cannot be availed on Demo Vehicles.
In the case of Chowgule Industries Private Limited [Advance Ruling No. GST-ARA-18/2019-20/B-121, dated 26.12.2019], the AAR, Maharashtra ruled that the Demo Vehicles were used for a specific period and then sold after paying the applicable taxes on sale value at that time. As a result, the AAR held that such sale of Demo Vehicles amounted to making additional supplies, and when no time limit is prescribed in the CGST Act, such sale would be eligible for ITC.
In the case of Chowgule Industries Private Limited [Order No. GOA/GAAR/07 of 2018-19/4796 dated 29.03.2019], the AAR Goa made a similar observation that the capital goods used in the course or furtherance of business are eligible for ITC and hence, the applicant is eligible for ITC on Demo Vehicle as the purchase of the Demo Vehicle was made in the furtherance of business.
In the case of Narsingh Transport [Order No. (2019) 104 dated 18.02.2019], the AAR, Madhya Pradesh held that the Applicant is entitled for ITC on the demo Vehicles that are subsequently leased to customers, subject to the conditions set out in Notification No. 11/2017- CT (Rate) dated 28.06.2017 as amended from time to time.
If the Vehicle is not leased to the same or another customer after the lease agreement/contract expires, the Applicant is required to return the ITC. Moreover, such Vehicles must comply with the regulations of the MV Act and must be registered for commercial use with the regional Transport Authority.
The mechanism of ITC under the GST regime is a noble approach to restrict the cascading effect of taxes and enable the registered taxpayer to effective set off the input tax paid by it against its output tax liability. The primary criteria for such set off of input tax against the output tax liability is that the inputs must have been acquired in the course of business or for the furtherance of business.
Although the CGST Act enables the claim of ITC on most supplies, Section 17 of the CGST Act lays down certain supplies or events over which ITC is blocked and is not admissible. Similarly, Section 17(5)(a) of the CGST Act restricts the availability of ITC on supplies of Motor Vehicles, except when such supplies are primarily associated with a commercial aspect of earning income.
Thus as per Section 17(5)(a) of the CGST Act, ITC is admissible when the Motor Vehicle is used to make further sales, to impart driving training or for the transportation of passengers and goods. However, when the Motor Vehicle is intended for personal use of the registered person, ITC cannot be availed on such supplies.
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