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Input Tax Credit on Motor Vehicle

Input Tax Credit on Motor Vehicle

Input Tax Credit on Motor Vehicle

As per provisions contained under section 17(5) of CGST Act, input tax credit (ITC) is not available for certain supplies under GST. These supplies are also named as blocked credit. The relevant provision of section 17 (5) are explained hereunder;

As per section 17 (5) input tax credit shall not be available in respect of the motor vehicles and other conveyances, however, following are the exceptional to the same –

  1. Motor vehicles and other conveyances used for making following taxable supplies –
  • Further supply of such vehicles or conveyances;
  • Transportation of passengers;
  • Imparting training on driving, flying, navigating such vehicles or conveyances.
  1. Motor vehicles and other conveyances that has been used for transportation of goods.

After going through the above provisions, one can easily conclude that, the input tax credit of inward vehicles and other expenses as incurred in relation to the vehicles cannot be denied under following circumstances;

  1. Input tax credit cannot be denied in case the motor vehicles are being used by the business entities for transport of its raw-material, semi-finished goods, final produce and/or capital goods like plant & machinery, spares, stores and/or fuel; and
  2. Input tax credit even cannot be denied in the case where the business entities use the vehicle for transport of its staff or workers on chargeable basis.

While analyzing the above provisions of section 17 (5), one can observe that Sec. 17(5)(a) of the CGST Act, 2017 suggests that input tax credit “in respect of” motor vehicle is barred. Now the question will arise that “Whether the phrase “in respect of” will also include expenses related to such motor vehicle?”

Since the word “in respect of” is highly controversial, there has been a lots of discussion on the same and on the basis of the same some of the experts are of view that the same would have wider impact and can covers all the goods and services that are relatable to motor vehicles, however, some are of the view that this phrase is very restricted and is limited to Input Tax Credit on the purchase of motor vehicles.

Government Stand on Admissibility of Input Tax Credit

Government has unofficially, come up with two views, one through twitter reply and another through replying FAQ, and both the views are controversial in nature.

Earlier through the twitter reply by the department it had been clarified that the input tax credit on repair and maintenance of the vehicle is not admissible. (Copy of twitter page attached)

However, recently, government has replied to FAQ on 28.12.2017 and has given clarification on this aspect. The clarification given is as follows:-

Question – Whether GST paid on insurance and repairs on vehicles is allowed, when vehicles is used for Business purpose only?

Answer – ITC is available

Thus, Government is also changing its stand. The Government has taken restricted meaning of phrase “in respect of” in recent clarification and has clarified that the GST paid on insurance and repair on vehicles is allowed, when the vehicle is used for business purpose only.

Thus, going by this clarification, all the other services that are related to motor vehicles are admissible as input tax credit. It is worthwhile to mention here that these FAQs have no legal validity, but since the language has different interpretations; we can definitely follow the same.

However, the law still seems to be very nascent at this stage and clear clarification from the government on the matter would be highly appreciated. We can only hope that government will soon come up with some clear clarification in this matter, in order to avoid litigation.