ITC on Motor Vehicles and Car Purchase Under GST

The short answer on input tax credit on car purchase is that it is blocked for most businesses. Section 17(5)(a) of the CGST Act blocks credit on passenger vehicles with 13 seats or fewer, and clauses (ab) and (b)(i) extend the block to their insurance, repairs and hire. But the block is narrower than many people assume: goods vehicles are outside it, larger buses are outside it, and car dealers, taxi operators and driving schools keep their credit. This guide sets out the rule as it has stood since the amendments that took effect on 1 February 2019, with worked examples.

The rule in Section 17(5)(a)

Section 17(5) lists the purchases on which credit is not available even when they are used in the business — the full list is in our guide to blocked credits under Section 17(5). Clause (a) blocks ITC on:

• motor vehicles (as defined in the Motor Vehicles Act);
• for transportation of persons;
• having an approved seating capacity of not more than 13 persons, including the driver.

All three conditions must be met for the block to apply. Seating capacity is the capacity approved at registration, as shown on the registration certificate — not how many people you actually carry. A car, SUV or MPV bought for the business therefore falls inside the block, whichever way it is used day to day. If you are new to how credit works generally, start with what input tax credit is.

The three exceptions

Even a vehicle that meets all three conditions carries credit when it is used for making any of these taxable supplies:

1. Further supply of such motor vehicles — a dealer buying cars to sell them.
2. Transportation of passengers — a taxi, cab or tour operator carrying passengers for consideration.
3. Imparting training on driving such motor vehicles — a driving school.

The exceptions are about the outward supply the vehicle is used for, not the nature of the buyer's business in general. A consulting firm's car is blocked even though the consulting is taxable; a taxi company's office car, used by the managing director rather than for passengers, is blocked too.

Goods vehicles are not blocked

A vehicle used to transport goods is outside clause (a) altogether. GST paid on a truck, tempo, delivery van or pick-up used in the business is available as credit, subject to the ordinary conditions in Section 16 — a valid tax invoice, receipt, the supplier's return and payment within 180 days. As these are usually capital goods, see ITC on capital goods for how the credit is taken and what happens if the vehicle later goes to exempt use, and Rule 42 and Rule 43 reversal where it is used for both. If you hire a transporter rather than owning trucks, the freight is a separate question covered in GST on goods transport agencies.

Insurance, servicing and repairs

Clause (ab) blocks ITC on general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles blocked under clause (a). The block follows the vehicle:

• if credit on the vehicle is blocked, credit on its insurance premium, service bills and repairs is blocked too;
• if the vehicle falls within one of the three exceptions, or is a goods vehicle, the related insurance and repairs carry credit;
• credit is also allowed where these services are received by a manufacturer of such vehicles, or by a general insurer in respect of vehicles it insures.

So input tax credit on insurance of a company car is not available, but insurance on a delivery van is. Fuel is a separate matter: petrol and diesel are outside GST, so there is no GST credit to consider on them at all.

Rent-a-cab, leasing and hiring

Clause (b)(i) blocks ITC on leasing, renting or hiring of the motor vehicles referred to in clause (a), except where they are used for the purposes specified there. On top of that, two provisos allow credit:

• where the inward supply is used to make an outward taxable supply of the same category, or as an element of a taxable composite or mixed supply — a cab aggregator hiring cars to provide cab services, for instance;
• where providing the service to employees is obligatory for the employer under any law for the time being in force.

Hiring a cab for staff because it is company policy, or part of an employment contract, does not meet the second proviso; it has to be required by a statute. Hiring a bus with more than 13 seats is not caught by clause (b)(i) in the first place, because that vehicle is not one referred to in clause (a).

Worked examples

In each case insurance, servicing and repairs follow the same answer as the vehicle, and the credit is still subject to the conditions in Section 16 — see input tax credit rules explained.

Vessels and aircraft

Clause (aa) applies a parallel rule to vessels and aircraft: credit is blocked except where they are used for further supply of such vessels or aircraft, transportation of passengers, imparting training on navigating or flying them, or transportation of goods. Their insurance, servicing and repairs are handled by clause (ab) in the same way as for motor vehicles.

Common mistakes

• Claiming credit because the car is "used only for business". Business use is not one of the exceptions.
• Claiming credit on the service bill while not claiming it on the car. The repairs are blocked for the same reason the car is.
• Missing credit on goods vehicles. Trucks and vans are often booked like cars and the credit is never taken.
• Letting a blocked credit reach GSTR-3B. Blocked ITC appearing in GSTR-2B has to be excluded or reversed in GSTR-3B; if it has been taken, reverse it with interest. See the GSTR-3B filing guide.
• Claiming both credit and depreciation on the tax. Where ITC is blocked, the GST is part of the cost; where it is taken, depreciation on that component is not allowed.

Frequently asked questions