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During Internal Audits and statutory audits, I came across various misunderstandings in the mind of the persons in-charge of Indirect tax department with respect to ITC on Motor Vehicles, other Conveyance, repairs and maintenance thereof etc. This prompted me to share my analysis on this subject with my viewpoint for the benefit of the business at large.

Subsection 5 of section 17 which restricts/blocks/disallow ITC in respect to certain Goods and services was amended effective from 1st February 2019.

For the ready reference, I put below the provisions relevant to the above subject side by side in a tabular format, (the provisions not related to Vehicles are removed):

Provisions applicable upto 31st January 2019 referred to in as "old Provisions"

Provisions applicable w.e.f. 1st February 2019 referred to in as "New provisions" or "amended provisions"

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following namely:

(a) motor vehicles and other conveyances except when they are used-

(i) for making the following taxable supplies, namely:—

(A) further supply of such vehicles or conveyances ; or

(B) transportation of passengers; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

(b) the following supply of goods or services or both—

(i)----------;

(ii)---------;

(iii) rent-a-cab,------ except where- -

(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and

(iv)-----

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following namely:-

(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely: —

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;

(aa) vessels and aircraft except when they are used- -

(i) for making the following taxable supplies, namely:—

(A) further supply of such vessels or aircraft; or

(B) transportation of passengers; or

(C) imparting training on navigating such vessels; or

(D) imparting training on flying such aircraft;

(ii) for transportation of goods;

(ab) services of general insurance,

servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

Provided that the input tax credit in respect of such services shall be available—

(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

(ii) where received by a taxable person engaged—

(I) in the manufacture of such motor vehicles, vessels or aircraft; or

(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

(b) the following supply of goods or services or both—

(i)------, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, -----:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii)-----; and

(iii) -----.

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide to its employees under any law for the time being in force.

ITC in respect of Motor Vehicles

Clause (a) of sub-section 5 of section 17 of CGST Act has been substituted by new Clauses (a), (aa) and (ab).

Clause (a) of sub-section 5 of section 17:

The old provisions of clause (a) ibid disallow ITC in respect to "motor vehicles and other conveyances excluding the one used for transportation of goods"; whereas the new provisions of clause (a) ibid disallow ITC in respect to "motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver),"

Meaning thereby as per the new provisions effective from 1st February 2019:

1. ITC shall be available now on other conveyances which are neither Motor vehicle nor the conveyances mention in newly inserted clause (aa) i.e. vessels and aircrafts.

In other word, ITC shall now be available in respect to non-motorised vehicle such as Cycles, Cycle rickshaw and Motorised Vehicles with engine capacity not more than 25CC.

2. As per section 2 (28) of the Motor Vehicle Act, Motor Vehicle means the mechanically propelled vehicle excluding the vehicle which has less than four wheels having engine capacity not more than 25CC and therefore, in view of this, the ITC is not available in respect to two wheelers i.e. scooters and motor cycles which are normally with more than 25CC engine.

3. ITC shall also be available to the vehicles running upon fixed rails (e.g. locomotives, wagons) or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises (e.g. Golf Carts).

4. Availing ITC even in respect to passenger Motor Vehicles like cars, three-wheelers etc. which are adapted for use only within the premises may be considered.

5. ITC shall be available now in respect to the vehicles used for

  • Transportation of other than persons and transportation of goods ( it may be noted that ITC on Vehicles used for transportation of goods was available also upto 31st January 2019), or
  • Transportation of persons, including driver, with approved capacity more than 13 persons.

6. The following exceptions to the provisions are made i.e. ITC can be availed if used for:

  • further supply of such motor vehicles; or
  • transportation of passengers; or
  • imparting training on driving such motor vehicles;

Clause (aa) of sub-section 5 of section 17:

A new clause (aa) is inserted to disallow ITC in respect to Vessels and Aircrafts in line with motor vehicle mentioned in clause (a) except when used for making the following taxable supplies, namely:—

  • further supply of such vessels or aircraft; or
  • transportation of passengers; or
  • imparting training on navigating such vessels; or
  • imparting training on flying such aircraft;
  • in addition to above, in respect to Vessels and Aircrafts used for transportation of goods;

Insertion of this clause was required for the reason that the clause (a) has dropped the words "other conveyances"

Clause (ab) of sub-section 5 of section 17:

Further a new clause (ab) has also been inserted to disallow ITC in respect to services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except in the following cases where ITC shall be available :

  1. where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;
  2. where received by a taxable person engaged:
  • in the manufacture of such motor vehicles, vessels or aircraft; or
  • in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

There was a general understanding that the ITC was disallowed not only on service of but also on the goods used for repairs and maintenance of Motor Vehicles and other conveyances as the words used in section 17 (5) read with clause (a) are " in respect of motor vehicles and other conveyances"

The careful reading of the provisions above alongwith the exception to the provisions it would be clear that the clause is meant to disallow the credit only on supply of vehicles and not on the service of repairs, maintenance and general insurance.

From the comparison of new Clause (ab) and the old provisions the following additional conclusions can be drawn:

  1. That the ITC is disallowed only on Services of general Insurance, servicing repair and maintenance w.e.f. 1st February 2019 and not on goods.
  2. That the ITC is not disallowed on the Goods purchased by the taxable person for repair or maintenance of such Motor vehicles, Vessel and aircrafts w.e.f. 1st February 2019.
  3. That the ITC on Services of general Insurance, servicing repair and maintenance was allowable on Motor vehicles and other conveyance also upto 31st January 2019.
  4. That the ITC was allowable on the Goods purchased by the taxable person for repair or maintenance of such Motor vehicles and other Conveyance also till 31st January 2019

Clause (ab) of sub-section 5 of section 17:

Rent-a-Cab

The Amendment Act also substituted the old clause (b) by a new clause (b) whereby the sub-clause (iii) which reads as under has been deleted

"(iii) rent-a-cab, life insurance and health insurance except where:

(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and" and inserting the following words in the clause sub-clause (i) itself

"leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein,--------------:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply; "

The word "cab" or the term "rent-a-cab" have not been defined under the GST law the Motor Vehicle Act also does not define the word "cab" instead it defines the terms "Motor Cab" and "Maxi cab" as under and for the purpose of rent-a-cab service disallowed under the old provisions, we must consider both type of cabs :

"maxicab" means any motor vehicle constructed or adapted to carry more than six passengers,but not more than twelve passengers, excluding the driver, for hire or reward;

"motorcab" means any motor vehicle constructed or adapted to carry not more than six

 

passengers excluding the driver for hire or reward.

The Motor Vehicles Act differentiates between "contract carriage" and "renting of cab". The Contract carriage is defined as a motor vehicle which carries a passenger or passengers for hire or reward and is engaged under a contract, whether expressed or implied, for the use of such vehicle as a whole for the carriage of passengers mentioned therein and entered into by a person with a holder of a permit in relation to such vehicle or any person authorised by him in this behalf on a fixed or an agreed rate or sum—

(a) on a time basis, whether or not with reference to any route or distance; or

 

(b) from one point to another,

and in either case, without stopping to pick up or set down passengers not included in the contract anywhere during the journey.

Though the term "rent-a-cab" is not defined as such but the Motor Vehicle Act provides for Scheme for renting of Motor Cabs from which one can derive the meaning of renting of cabs as "renting of motor cabs or motor cycles to persons desiring to drive either by themselves or through drivers, motor cabs or motor cycles for their own use"

Now, under the new provisions, services of leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) have been denied ITC or in other words ITC is disallowed not only on Contract carriage and rent-a-cab but also on the leasing of thereof ,

There are following exceptions to this are made in where ITC shall be available :

  1. further supply of such motor vehicles, vessels or aircraft; or
  2. transportation of passengers; or
  3. imparting training on navigating such vessels; or
  4. imparting training on flying such aircraft;
  5. imparting training on driving of such Motor Vehicles;
  6. in addition to above, in respect to Vessels and Aircrafts used for transportation of goods;
  7. where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply

From the above analysis, it can be concluded that (excluding the exceptions enumerated above):

1. As per old provisions upto 31st January 2019

  • ITC was not denied in case of contract carriage of Motor Vehicles irrespective of seating capacity,
  • ITC was available on leasing of Motor Vehicles of all seating capacities used for any purpose,
  • ITC was available on leasing, hiring and renting of Vessels and aircrafts used for any purpose
  • ITC was not denied on renting of the motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons including driver,
  • ITC on rent-a-cab service was available in case notified by the Government as a service obligatory for an employer to provide to its employees under any law for the time being in force

2. W.e.f. 1st February 2019

  • ITC is not available in case of contract carriage nor on renting of Motor Vehicles for transportation of persons having approved seating capacity of not more than 13 persons including driver,
  • ITC is not available on leasing, hiring or renting of Motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons including driver, Vessels and aircrafts
  • ITC is available on leasing, hiring or renting of Motor vehicles for transportation of persons having approved seating capacity of more than 13 persons including driver,
  • ITC shall be available in the cases notified by the Government as a service obligatory for an employer to provide to its employees under any law for the time being in force with regards to leasing, hiring or renting of Motor Vehicles with seating capacity of not more than 13 persons including driver, vessels and aircrafts,
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