Input Tax Credit
- Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs. Input Tax Credit is the backbone of GST. GST was implemented to remove the cascading effect of taxes i.e. to make seamless flow of credit available at every stage of supply chain. In GST, it is the provisions of ITC which essentially make GST a value added tax i.e. collection of tax at all points of supply chain after allowing credit of tax paid at earlier points. This seamless chain of credit is broken in case of supplies charged to Composition scheme, Supply of exempted goods or services or both, Ineligible ITC on certain goods or services or both (as provided in Section 17(5) of CGST Act, 2017).
Section 17(5) envisages some situations, in which credit shall not be available to recipient of goods or services or both. ITC on Motor Vehicle is one such case provided in Section 17(5) i.e. ITC in respect of motor vehicle is not available except in conditions as provided.
Motor Vehicle
- First of all, let us understand what Motor Vehicle is. The term Motor Vehicle has been defined as:
- “Motor vehicle” or “Vehicle” means 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.
- Thus, it can be inferred that followings are not motor vehicles as per above definition and credit shall be allowed in respect of them:
- Vehicle running upon fixed rails
- Vehicles adapted for use only in a factory or enclosed premises
- Two-wheeler or three wheelers with engine capacity of 25 CC or less.
Eligibility of ITC on Motor Vehicles
Now, let’s understand when ITC is eligible in respect of motor vehicles and when it is not eligible.
| Motor vehicle for | Used for which purpose | Eligible or not? |
| Transportation of Goods | Any Purpose | Yes |
| Transportation of passenger having approved seating capacity of more than 13 persons (including driver) | Any Purpose | Yes |
| Transportation of passenger having approved seating capacity of 13 or less than persons ( including driver) | 1.Further supply of such motor vehicle2.Transportation of passengers3.Imparting training on Driving | Yes |
| Transportation of passenger having approved seating capacity of 13 or less than persons (including driver) | Any Purpose except above 3 | No |
Further, ITC of general insurance, servicing, repair and maintenance in respect of motor vehicles shall not be allowed except as permitted above. Further, in two more cases ITC of general insurance, servicing, repair and maintenance shall be available, which are as follows:
- Where above services are received by a person engaged in manufacture of such motor vehicles.
- Where above services are received by a person engaged in supply of general insurance of such motor vehicles insured by him.
Frequently Asked Questions
| Q. Whether Credit shall be available for two – wheelers used for business purpose? A. No, credit not shall not be available since most of two- wheelers have engine capacity of more than 25 CC. Since engine capacity is more than 25CC, they are covered under definition of motor vehicle and ITC shall not be available. |
| Q. Whether ITC on Motor Car purchased for Demo purpose can be availed and set off against output tax payable? A. In Advance ruling in case of M/s Chowgule Industries Private Limited, it was held that Input Tax Credit on the Motor Vehicle purchased for demonstration purpose can be availed as Input Tax Credit on Capital Goods and set off against output tax payable under GST. |
| Q. Whether credit of tempo, truck etc. used for transportation of goods can be availed? A. Yes, ITC can be availed since they are used for transportation of goods and credit is not blocked in respect of the same. Q. Whether ITC of insurance, service or repair is eligible in respect of motor vehicles? A. No, credit of insurance, service or repair is blocked u/s 17(5) in respect of motor vehicle except as permitted above. |
Follow us on Instagram, Twitter and LinkedIn for regular Updates related to GST, Income Tax and Financial matters.
