Introduction
Input Tax Credit (ITC hereinafter) is one of the key characteristics of the Goods and Services Tax (GST) Laws. ITC was the answer to the cascading of taxes at each level from production to the end customer. Because of the central role ITC plays in the GST process, it has been subject to a lot of litigation.Within ITC, there are several facets that are subject to litigation such as mismatch of values in forms, incorrect claims etc. For registered businesses that operate on a large scale, another pressing issue that adds on is the confusion that is a result of perusal of section 17(5) of the CGST Act. Under this section, the conditions for the claim of ITC for motor vehicles are listed out. The complex language of the section has made the application of it unnecessarily difficult. This article sets out to clarify various scenarios and the corresponding course of action considering various precedents and rulings.
Analysis of Section 17(5)
The language of this section is excessively pedantic dealing with three factors:
- Vehicle Type
- Seating Capacity
- Purpose of Use
When the conditions of the clause (a) are met, ITC is blocked is the key legal principle. Unlike most sections under various acts, this section is written in a complex fashion. In short, for example, the legal principle is that ITC is blocked if the vehicle is a car and its seating capacity is lesser than or equal to 13 and is not used for any of the exceptions mentioned in the sub clause.
There has been significant confusion regarding when ITC can be availed. However, with the examples of various rulings of the Authority for Advanced Ruling (AAR), the confusion can be resolved.
ITC on Motor Vehicles Used for Rent or Lease
Sub-clauses (A)-(C) of Section 17(5)(a) of CGST Act specifies the criteria that form the exceptions to avail ITC. Motor Vehicles that satisfy these can avail ITC. However, the exception to this is found in clause (b). The purpose of the vehicle should neither be to rent out or lease out. Therefore, the legal principle is that ITC is not allowed on leasing or renting of motor vehicles even if the exceptions of clause (a) are met. The only exceptionto this is provided by the proviso which allows it only when the inward supply and the outward supply belong to the same category ie in this case leasing or renting.
The AAR of Tamil Nadu has however clarified that the employer can avail ITC on transport of its employees only if it is under a law.For example, transport of female employees during late hours under the Tamil Nadu Shops and Establishments Act, 1947 is not blocked by section 17(5) of CGST Act.This is a welcome ruling that relaxes the strictness of this section.
ITC on Vehicles Used for Transportation of Employees
The AAR of Maharashtra dealt with a case that raised the issue of whether an employer could avail ITC on the amount collected from employees for providing transportation. It was ruled that ITC could not be availed on the amount collected due to the employer-employee relation that falls out of the ambit of ‘supply' under GST laws.However, the employer could avail ITC on the GST charged by the service provider (vehicle with capacity of more than 13).
The conclusion on this is that ITC can be availed by employer when transporting employees only under an act as explained above. In every other case, employer can only avail ITC from service provider subject to meeting the conditions of section 17(5) of CGST act.
Examples of Scenarios
1. A 5-seater car for the CEO of company. ITC is blocked due to the seating capacity of the vehicle. There is no need to refer to further clauses or rulings since clause (a) itself is not satisfied.
2. Purchase of cars which is used for the purpose of rent-a-cab.The AAR of West Bengal ruled that rent-a-cab is not defined but is in the nature of renting a vehicle which falls under clause (b) of section 17(5).
3. 5-seater cars purchased by driving school. ITC is available since this scenario is squarely covered by section 17(5)(a)(C).
4. A food delivery company leases out scooters. ITC is not available for two reasons. One is that exceptions of clause (a) are not met. The other reason is that the proviso to clause (b) requires the inward supply and outward supply to belong to the same category. In this case, the inward supply belongs to the category ofleasing and outward supply is food/beverage.
Conclusion
Motor vehicles and transportation play a central role in many businesses.Various rulings of the AAR have clarified some scenarios that have arose with respect to availing motor vehicle ITC. The purpose of a GST regime is beaten if the complexity of the section and lack of legal clarity prevents a business from availing credit.The Hon'ble Supreme Court or the High Court is yet to frame guidelines or provide clarity on this section. Till such time, the framework is as follows: Meeting the exceptions of clause (a) alone is not sufficient. Any scenario should meet the conditions of clause (a) and (b) along with the proviso. The proviso has been clarified by the AAR to apply for the entire subsection. Any confusion arising despite this framework is for the AAR to clarify.
The jurisprudence on any law is far from being settled. The nature of law is such. However, with respect to this topic, courts are yet to issue guidelines or set any precedent. This shouldn't however prevent businesses from availing ITC. Till such time there is legal development on this topic, the aforementioned discussion of rulings of AAR will be useful.
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