GST UPDATE No 116 ON ITC ADMISSIBILITY ON RENTING OF VEHICLES HAVING SEATING CAPCACITY BELOW 13 PERSONS

The issue regarding availability of input tax credit (ITC) on renting/hiring of motor vehicles has been contentious issue since inception. It was believed that there would be less disputes as regards ITC admissibility in GST regime as the law was formulated with the idea of providing seamless flow of ITC. However, the restrictions imposed vide section 17(5) has defeated the basic idea of seamless flow of credit and has ignited humongous litigation. Recently, we had discussed in detail the admissibility of ITC in case of hiring of buses by employer for transportation of employees and it was held by UP AAR in the case of DR WILLMAR SCHWABE (I) PRIVATE LIMITED that ITC is admissible in such cases. However, recently Tamil Nadu AAR in the case of NEW PANDIAN TRAVELS PRIVATE LIMITED [ORDER NO. 43/AAR/2021 dated 30.11.2021] considered the issue as regards availability of ITC on motor vehicles having seating capacity of less than 13 persons when rented to another company for transportation of its employees. The outcome of this decision is the subject matter of discussion of the present update. The applicant is engaged in transporting passengers as a rent-a-cab operator by providing the motor vehicle on hire or rental basis, either directly to the passengers or to the organisations for transportation of their employees. They are presently classifying their services under SAC 996601 under rent-a-cab operator and paying GST at the rate of 5% without availing facility of ITC. They have entered into agreement with Amazon to provide motor vehicles having seating capacity of less than 13 persons for transportation of its employees. Similarly, they are also providing renting of motor vehicles for transporting the employees of a SEZ unit. They have sought advance ruling as regards admissibility of ITC for goods or services used in providing the service of renting of motor vehicles. Their main contention is that as per provision contained in section 17(5) of the CGST Act, 2017, ITC on motor vehicles having approved seating capacity of less than 13 persons is restricted except when motor vehicles are used for further supply of such motor vehicles. It is being pleaded that as per definition of supply given under section 7 of the CGST Act, supply includes rental, lease and so the activity of renting of motor vehicles is covered by the exception carved out in the law. Moreover, it is also pleaded that ultimately, what is rendered by it is the service of transportation of passengers which is also covered by the exception and so merely because the agreement is entered for renting of motor vehicles to the company, it cannot lead to classification of the said service as lease rentals rather than transportation of passenger service. As regards supply of renting of motor vehicles made to SEZ unit is concerned, it is stated that it is taxable supply being zero rated supply and the ITC is available on the same also. The applicant also pointed that section 17(5)(a)(B) permits ITC on motor vehicles used for making taxable supplies of “transportation of passengers” and does not distinguish between a service provider of transporting passengers directly or engaged in transporting employees of an organisation by hiring or letting. Reliance was placed on the decision given in the case of M/S NARSINGH TRANSPORT by AAR Madhya Pradesh. The counsel for the department contended that the only exceptions for availing ITC on motor vehicles is further supply of such motor vehicle, transportation of passengers or imparting training or driving on such motor vehicles. As the renting/hiring of motor vehicles is not covered under exception, ITC is not available to the applicant. It was also pleaded that as applicant has opted for paying GST @5% without ITC facility, they are unable to avail any ITC. The AAR concluded that after perusing the agreements, it is found that the supply is restricted to the vehicle with drivers. The usage, i.e., Trip Schedules, routes, etc are done by the Transport team of the Vendor. The applicant is responsible for supplying the services of 'Rent-a -cab', wherein the vehicle with the driver is supplied to the vendor, who uses such services received from the applicants for the transporting requirement of their staff/officers. Hence, the service provided is “renting of vehicles with operators” falling under SAC 9966. As regards contention that the activity is covered under “further supply of such motor vehicles”, AAR held that the phrase means that ITC is available if the motor vehicles is sold as it is and the activity of renting/leasing cannot be considered as supply of such motor vehicle. Moreover, as the decision regarding route, nodal points for transport, staff to be plied etc. istaken by the Amazon company, the activity of transportation is being carried out by Amazon company and not the applicant. The applicant is only engaged in renting/leasing of motor vehicles which is not eligible for ITC under any of the exceptions to section 17(5). On similar analogy, AAR concluded that no ITC could be availed even for transporting employees of the SEZ unit. The above cited decision delves deep into the interpretation as regards exceptions to admissibility of ITC on motor vehicles having approved seating capacity of less than 13 persons. As per section 17(5), ITC on such motor vehicles is restricted except when used for further supply of such motor vehicles or used for transportation of passengers. The reasoning adopted for the case being not covered under further supply of such motor vehicles is convincing. However, the contention of the applicant as regards admissibility of ITC as it is used for transportation of passengers appears to be logical. If the provision of section 17(5) is interpreted literally, ITC is inadmissible on motor vehicles except when they are used for making taxable supply of transportation of passengers. In the present case, although technically the applicant is providing renting of motor vehicle service but if ultimately the said service is being used for transportation of passengers, the benefit of ITC should be allowed. The intention of the government for carving out exceptions is that the persons engaged in business of supplying motor vehicles or ancillary services should be allowed to avail ITC with respect to motor vehicles. In our opinion, observing the intention of the legislature, merely because there is no specific entry for the activity of renting/leasing of motor vehicles, the genuineness of availing ITC cannot be ignored. It is hoped that suitable amendment is carried out in the exceptions so as to commensurate the provision with the intention of the law.

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GST UPDATE No 116 ON ITC ADMISSIBILITY ON RENTING OF VEHICLES HAVING SEATING CAPCACITY BELOW 13 PERSONS

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