If you’re a GST-registered individual, you can claim an input tax credit (ITC) for goods and services purchased for use in your business. Section 16 of the CGST Act, 2017 contains the provisions for claiming ITC. However, under section 17(5) of the Act, ITC is subject to certain limitations. Motor vehicles are one example of such a restriction. The availability of ITC in the case of motor vehicles will be discussed in this article.

We’ll go over the definition of “Motor Vehicle” before looking at the terms of section 17(5) of the CGST Act. Section 2(76) of the CGST Act defines a motor vehicle as follows:

What is motor vehicle?

Motor vehicle” or “Vehicle” means any mechanically propelled vehicle adapted for use on 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, as well as a trailer; but it does not include a vehicle running on fixed rails or a vehicle of a special type adapted for use only in a factory or other enclosed premises, or a vehicle that is designed for use.

Following are not considered as motor vehicle

  • A vehicle that travels on tracks that are not moving.
  • Vehicles designed solely for usage in a factory or other enclosed environment
  • Two-wheelers and three-wheelers with engines rated at 25 cubic centimetres or less.

Section 17(5) of the CGST Act provides for a blocked input tax credit.

2017 input tax credit is not applicable on the following items, according to Section 17(5) of the CGST Act:

  1. Except when they are used to make the following taxable supplies, motor vehicles used for transportation of individuals with a permitted seating capacity of not more than thirteen persons (including the driver)
  2. Passenger transportation – the registered person engages in the passenger transportation industry; or
  3. Giving instruction on how to drive such vehicles – the registered person is in the business of giving instruction on how to drive such vehicles.

Continuing to supply such motor vehicles – the registered person is in the business of selling such vehicles; or

(aa) Ships and airplanes, except while in use–

(i) To make the taxable supplies listed below:

Further provision of such vessels or aircraft; or passenger transportation; or instruction in sailing such vessels; or instruction in flying such aircraft;

(ii) For commodities transportation;

(ab) General insurance, servicing, repair, and maintenance services in relation to the motor vehicles, boats, or aircraft mentioned in clauses (a) and (aa):

Provided, however, that the input tax credit for such services is available—

(i) When the motor vehicles, watercraft, or aircraft mentioned in clauses (a) or (aa) are employed for the purposes stated;

(ii) When received by a taxable person in the course of his or her business—

(iii) In the production of such automobiles, ships, or planes; or

(iv) In the provision of general insurance services in relation to the motor vehicles, boats, or airplanes that he insures;

Summary:

section 17(5)(a) of the CGST Act, 2017 denies input tax credit on motor vehicles used for transportation of persons with an approved seating capacity of less than thirteen persons (including the driver), unless they are used for further supply of such motor vehicles, transportation of passengers, or imparting driving training.

In addition, section 17(5)(ab) of the CGST Act, 2017 prohibits input tax credit for general insurance, servicing, repair, and maintenance for motor vehicles with a seating capacity of less than thirteen passengers, except for services related to motor vehicle insurance, repair, and maintenance of such vehicles if they are used for the purposes listed in the preceding paragraph.

The following inference can be drawn from the reading of section 17(5): –

  • Motor vehicles that are used or intended to be utilized for the transportation of products are eligible for an input tax credit (ITC).
  • ITC will be allowed for passenger transportation vehicles with a seating capacity of more than 13 people (including driver). In this regard, there is no such restriction on ITC.
  • ITC shall be banned in the case of passenger transport vehicles with an allowed seating capacity of not more than 13 persons, subject to exceptions.

ITC on motor vehicles that are used to deliver goods

ITC is offered for motor vehicles used in the transportation of goods business, as well as ITC on general insurance, servicing, repair, and maintenance services for such vehicles. This clarifies that the CGST Act limits ITC to only those motor vehicles listed in Section 17(5) (a), with a few exclusions and inclusions.

Feeling overwhelmed about claiming input tax credit for the GST paid on purchase of goods and services? Get in touch with PhoenixTax- GST consultant in Tambaram, Chennai who can get your issues resolved in no-time.