ITC on vehicle hiring services

Great questions! Here’s a clear explanation regarding ITC (Input Tax Credit) and GST on vehicle hiring services:

1) If you charge 5% GST (under composition or specific concessional rate) and the service recipient pays GST under Reverse Charge Mechanism (RCM):

• When you charge 5% GST on hiring services, generally it’s the supplier's GST (you) charged to the recipient.

• If the recipient is liable to pay GST under RCM (Reverse Charge), you do not collect GST from them. Instead, the recipient pays GST directly to the government.

• In this case, you are not collecting GST from the recipient, so you are not eligible to claim ITC on GST paid on car purchase because your supply is considered exempt or non-taxable for ITC purposes.

• Also, input tax credit on vehicle purchase (capital goods) and expenses like insurance & servicing is generally not allowed if the vehicle is used for supplying exempt/non-taxable services.

2) If you charge 12% GST on your vehicle hiring services:

• You are charging GST as a normal taxable supply.

• As a registered taxpayer charging GST, you are eligible to claim ITC on the GST paid on purchase of the vehicle (capital goods), as well as ITC on GST paid on insurance and servicing expenses, provided:

  • The vehicle is used for business purposes.

  • The services you supply are taxable (which is true here if you charge GST at 12%).

• So, if you charge 12% GST, you can claim ITC on vehicle purchase, insurance, and servicing GST.

3) Can ITC be claimed on insurance and servicing in both cases?

• Only when you are supplying taxable services (charging 12% GST) can you claim ITC on related expenses such as insurance, servicing, fuel (if GST paid on fuel), etc.

• If your service is exempt or the recipient pays under RCM and you are not charging GST, then you cannot claim ITC on these expenses.

Summary Table:

Important Note:

• Vehicle used exclusively for personal use or for exempt supplies will not attract ITC.

• Also, GST on petrol, diesel, and motor spirit (fuel) is not eligible for ITC (except in certain sectors).