ITC eligibility on motor vehicle purchased to provide Rental Services

[Mahesh]

Respected Experts,

I have purchased some motor vehicles (Car) and used it to provide renting services. Under this, I have made agreement with third party, where as per agreement, they are charged certain amount monthly and they can use it for whatever purpose they wish to.

My query is:

1.Can I take ITC on the purchased cards? or is it blocked under Section 17(5)

2. Under which SAC, should I report in returns

My friend who is in same business informed that he has received a notice from state GST saying it is a blocked credit as it not in the 'further supply of such motor vehicle'.

Experts please shed light on this

[YAGAY andSUN]

The eligibility of input tax credit (ITC) on motor vehicles is governed by Section 17(5) of the CGST Act, 2017. As per Section 17(5)(a), ITC on motor vehicles for transportation of persons (seating capacity 13) is blocked, except where the vehicle is used for:

(i) further supply of such motor vehicles,

(ii) transportation of passengers, or

(iii) imparting training.

In the present case, the vehicles are used for renting under a contractual arrangement for consideration. The activity constitutes a taxable supply of service. Jurisprudence and departmental view recognize that "renting of motor vehicle" falls within the expression "transportation of passengers," provided the vehicles are deployed for such commercial use.

Accordingly, where the motor vehicles are used for providing taxable renting/leasing services, ITC should be admissible under the exception to Section 17(5), subject to satisfaction of conditions under Section 16 of the CGST Act, 2017. The phrase "further supply of such motor vehicles" is not the sole exception; "transportation of passengers" operates independently.

However, litigation risk arises where the arrangement is construed as a mere transfer of right to use (bare lease) without involvement in passenger transport activity. In such cases, authorities may contend that the use does not qualify under the exception and ITC is blocked. The substance of the agreement and actual usage becomes determinative.

The service is classifiable under Heading 9966. Typically, renting of motor vehicles with operator falls under SAC 996601, and without operator under SAC 996602, within the scheme of GST Tariff Notification No. 11/2017-Central Tax (Rate).

It is advisable to structure agreements and operations to demonstrate that vehicles are used in the course of providing taxable renting/transport services, maintain proper documentation, and ensure consistency in tax treatment.

AI Summary

Input tax credit on rented motor vehicles depends on Section 17(5) exceptions, service classification, and agreement substance. Input tax credit on motor vehicles used for taxable renting services is examined under Section 17(5) of the CGST Act, 2017. Although credit on motor vehicles for transportation of persons is generally blocked, exceptions exist where the vehicle is used for further supply, transportation of passengers, or training. When vehicles are deployed under a contractual renting arrangement for consideration, the activity may qualify as a taxable supply, subject to Section 16 conditions and proper documentation.