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Input Tax Credit (ITC) on car purchase under GST

Input tax credit (ITC) means taxes paid on purchases of goods or services can be claimed at the time of payment of taxes on output. With the introduction of the GST in India, expectations were high on seamless availability of Input Tax Credit on various business expenses such as car purchase, business travel, rent-a-cab, etc., that are currently 'blocked' under section 17(5) of GST Act.

In brief, specific cases are mentioned under GST law where the benefit of ITC is not available to taxpayers. In this article, we will discuss the availability of credit of GST paid on car buying.

Blocked credit on car purchase under GST

Broadly, ITC is blocked on motor vehicles having seating capacity ≤ 13 persons (including the driver) used for the transportation of persons. Further, ITC is also blocked on certain services relating to motor vehicles namely, insurance, servicing, and repair and maintenance.

Accordingly, expenditure on car purchase shall be covered under Blocked credit, and the GST paid on the purchase of a car will not be allowed to set off against output tax liability.

ITC on car purchase under GST

Exceptions to blocked credit on cars

There are certain exceptions to 'Blocked credit' on cars as well which means GST credit will be available on ineligible cars when used for the specified eligible purposes.

ITC shall be available on cars when used for any of the following eligible purposes-

  • making further taxable supply of motor vehicles
  • making taxable supply of transportation of passengers
  • making taxable supply of imparting training on driving such cars.

illustrations

Particulars

Input Tax Credit (ITC)

Car purchased by a Tech company for official use of its employee

Blocked

Car purchased by a car dealer for sale to customer

Allowed

Car purchased by a company engaged in renting out cars for transportation of passengers

Allowed

Car purchased by a car driving school

Allowed

General insurance taken on a car used by employees of a manufacturing company for official purposes

Blocked

General insurance services taken on cars manufactured by a car manufacturing company

Allowed

 

ITC on leased cars

In the matter of Narsingh Transport, MP AAR ruled that the applicant is entitled to avail ITC on cars (passenger vehicles) which are further supplied to customers on lease rent. Further, at the termination of the lease agreement/contract, if the vehicle is not further leased to the same or other customer, the applicant shall be liable to reverse the ITC so availed as per law.

ITC on demo car to car dealers

Car dealers usually purchase cars for resale. However, a few of those cars may also end up being used for demonstration purposes.

In the matter of Chowgule Industries Pvt. Ltd., Maharashtra AAR ruled that the car dealer shall be entitled to ITC charged on inward supply of motor vehicle which is used for demonstration purpose in the course of business of supply of motor vehicle as an ITC on capital goods and the same can be utilized for payment of output tax payable under this Act.

But, when such demo cars are sold, the car dealer shall pay an amount equal to the ITC taken on the said demo vehicles as reduced in the manner provided under Rule 44 of the CGST Rules, 2017 (ITC involved in the remaining useful life in months shall be computed on pro-rate basis taking useful life as 5 years) or the tax on the transaction value of such demo vehicles, whichever is higher.

Conditions for claiming ITC on car purchase

  • Buyer must be registered in the GST regime
  • Possession of GST invoice or debit note issued by the registered supplier
  • Relevant GST returns have been filed
  • Tax paid on purchases has been deposited by the supplier to the government
  • Purchase must not be covered under blocked credit.

Frequently asked questions (FAQs)

No, ITC shall not be available in this case as it is covered by the blocked credit. However, ITC can be claimed if the taxpayer is engaged in the business of making a further taxable supply of motor vehicles.

No, credit shall not be available in the instant case.


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CA Anand Singh

CA Anand Singh

I am a practising Chartered Accountant with 6 years of experience in Direct and Indirect Taxation, FEMA, Corporate Law and Audit etc.