GST UPDATE No. 105 ON ANALYSIS OF ITC ADMISSIBILITY ON HIRING OF MOTOR VEHICLE

In our earlier update, we had discussed the favourable ruling pronounced by UP AAR in the case of DR WILLMAR SCHWABE (I) PRIVATE LIMITED wherein it was held that the ITC with respect to hiring of motor vehicles is available to the applicant. In the present update, we seek to discuss the detailed reasoning behind the favourable decision pronounced by the UP AAR in light of the amended provisions contained in section 17(5) of the CGST Act, 2017. In order to understand the interpretation of the provision, the relevant extracts are produced for the sake of convenient reference as follows:- (5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (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; (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) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, 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, life insurance and health insurance: 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) membership of a club, health and fitness centre; and (iii) travel benefits extended to employees on vacation such as leave or home travel concession: 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 the same to its employees under any law for the time being in force. After reading the above provision, following points are worth noting:- 1. The restriction as regards availment of ITC on motor vehicles used for transportation of persons is only with respect to motor vehicles having approved seating capacity of 13 passengers with certain exceptions. Consequently, there is no restriction as regards availment of ITC on motor vehicles having approved seating capacity exceeding 13 persons. 2. Similarly, the restriction as regards availment of ITC on various services relating to motor vehicle such as of general insurance, servicing, repair and maintenance is also with respect to motor vehicles referred to in clause (a) being motor vehicles having approved seating capacity of 13 persons. Hence, there is no restriction in availment of such services in relation to motor vehicles having approved seating capacity exceeding 13 persons. However, with respect to motor vehicles having approved seating capacity of 13 persons, the ITC may be availed only if such motor vehicles are being used for specified purposes or such services are availed by general insurance service provider/manufacturer of such motor vehicle. 3. It is pertinent to mention that even the restriction of credit availment with respect to leasing, renting or hiring of motor vehicles is for motor vehicles having approved seating capacity of 13 persons as referred to in clause (a) and not for motor vehicles having approved seating capacity exceeding 13 persons. As such, there is no prohibition for availing input tax credit with respect to motor vehicle such as bus having approved seating capacity exceeding 13 persons, whether it be credit of purchase of bus or credit of various input services received as stated above. 4. There are two exceptions for availing the ITC of motor vehicles with approved seating capacity of 13 persons:- (i) If said services are used for providing an outward supply of same category of service. (ii) If said services are obligatory on part of employer to provide it for employees under any law for the time being in force. It is pertinent to mention here that as far as availability of credit under 4(i) is concerned, it is worth pointing out that the rate notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 prescribing GST rate of 5% specifies condition that the ITC on goods or services used in supplying the service has not been taken. However, this condition is applicable for the service provider providing services of transportation of passengers. In case where the motor vehicle has been hired for the benefit of employees by the employer, no GST is payable by the employer on the recovery made from employees as the employer is not engaged in providing transportation of passenger service in usual course of business. Moreover, as per notification no. 29/2019-Central Tax dated 31.12.2019, services provided by way of renting of motor vehicle designed to carry passengers where cost of fuel is included in the consideration charged is liable to GST under reverse charge if the services are received by a body corporate. One may ponder as to whether the ITC would be available to the employer if tax is paid under reverse charge mechanism? The answer is in affirmative as restriction is only on the service provider providing transportation of passenger service and not to the recipient body corporate paying GST under reverse charge mechanism. As far as the admissibility of ITC under 4(ii) is concerned, it is worth mentioning that an adverse view was taken by Gujarat AAR in the case of M/s TATA MOTORS LTD. as far as admissibility of ITC on canteen facility provided to employees under mandate of the Factories Act, 1948. We had made an extensive analysis on the said decision in our earlier update wherein we disagreed with the reasoning adopted by the AAR wherein it was held that the exception carved out for the obligation under any Law is not applicable for outdoor catering services. Likewise, we are of the opinion that where the renting/hiring of motor vehicles is under statutory obligation of the employer, for example, Shops and Establishments Act requires compulsory transport facility to women working late night, the ITC is admissible even if the motor vehicle is having approved seating capacity of 13 persons. The above analysis seeks to answer all the possible doubts arising as regards admissibility of ITC on the services of hiring of motor vehicles availed by the assessee under GST Law.

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GST UPDATE No. 105 ON ANALYSIS OF ITC ADMISSIBILITY ON HIRING OF MOTOR VEHICLE

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