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.

[Bruce]

Sir/Madam,

In the present case, it appears that the vehicles were provided under a rental agreement, whereby the end user is free to utilise the vehicle for any purpose, including transportation of passengers or keeping it idle.

Such an arrangement does not fall within the scope of the expression "transportation of passengers". The supplier can not take shelter of "further supply of such motor vehicles", as the inward supply is the purchase of motor vehicles (goods), whereas the outward supply is renting of motor vehicles (service).

Unless the querist is engaged in the specific activity of providing passenger transportation service like services that are distance based and fare linked, the mere provision of rental services under a service agreement (which appears without any operator) squarely attracts the restriction on input tax credit under Section 17(5) of the CGST Act.

Futher, renting of motor vehicles with operator falls under SAC 9966, and without operator under SAC 9973.

Pleas correct me, if I am wrong.

[VIPUL JHAVERI]

Having RTO Registration as taxi/commercial may be the easiest driving force to prove "Transportation of Passengers" ITC claim doors opens up with ease.

 

 

[Shilpi Jain]

'Further supply of such vehicles' will also include lease of such vehicles. So the credit is not blocked.

[Bruce]

Madam,

In the present case, it appears that the vehicles were provided under a rental agreement, whereby the end user is free to utilise the vehicle for any purpose, including transportation of passengers or keeping it idle.

Such an arrangement does not fall within the scope of the expression "transportation of passengers". The supplier can not take shelter of "further supply of such motor vehicles", as the inward supply is the purchase of motor vehicles (goods), whereas the outward supply is renting of motor vehicles (service).

Unless the querist is engaged in the specific activity of providing passenger transportation service like services that are distance based and fare linked, the mere provision of rental services under a service agreement(which appears without any operator) squarely attracts the restriction on input tax credit under Section 17(5) of the CGST Act.

Further, renting of motor vehicles with operator falls under SAC 9966, and without operator under SAC 9973.

Pleas correct me, if I am wrong

[YAGAY andSUN]

Your issue turns on the interpretation of Section 17(5)(a) of the CGST Act and the nature of your outward supply. The conflicting views you cited are both seen in practice; however, the legally sustainable position depends on substance over form of the arrangement.

1. ITC eligibility on motor vehicles

Section 17(5)(a) blocks ITC on motor vehicles (13 seats) unless used for:

• further supply of such motor vehicles,
• transportation of passengers, or
• training.

In your case:

• You are not making "further supply of goods" (i.e., resale of cars). Renting is a service, so this limb is generally not applicable.
• The key question is whether your activity qualifies as "transportation of passengers."

Two possible characterizations:

(A) Renting with operator / commercial passenger use (favourable view), If:

• vehicles are deployed as taxis/commercial vehicles,
• you retain operational control (driver/operator),
• consideration is linked to usage (distance/time),

then the activity aligns with passenger transport services, and ITC is admissible under the exception.

(B) Bare lease / renting without operator (risk view), If:

• vehicles are given on fixed monthly rent,
• possession/control transfers to customer,
• customer uses vehicles freely (even idle),

then it is treated as transfer of right to use / leasing, not passenger transport. In this scenario, authorities commonly hold ITC as blocked, as it does not satisfy any exception. This is the basis on which notices are being issued.

Conclusion on ITC:

• With operator / demonstrable passenger transport - ITC defensible
• Without operator / pure lease model - ITC exposed to denial

2. SAC Classification

• With operator (transport/renting integrated): SAC 996601 (rental of transport vehicles with operator)
• Without operator (leasing/right to use): SAC 9973 (leasing or rental services without operator)

Practical guidance

• Ensure commercial/taxi registration of vehicles.
• Prefer operator-based contracts or retain demonstrable control.
• Avoid pure fixed-rent, unrestricted usage structures if ITC is claimed.
• Maintain documentation evidencing actual passenger transport activity.

Bottom line: Your ITC position is fact-sensitive. In a pure leasing model, the department's view of blocked credit is legally supportable. Structuring and documentation are determinative.

AI Summary

Input tax credit on rented motor vehicles hinges on whether the arrangement is passenger transport or a bare lease model. Input tax credit on motor vehicles used for rental activity turns on whether the arrangement is treated as transportation of passengers or as a bare lease/right-to-use model. Section 17(5)(a) blocks credit on specified motor vehicles except for further supply, passenger transportation, or training, and the discussion notes that the further-supply exception does not usually cover a service transaction. Commercial deployment with operator control supports ITC, while fixed-rent unrestricted use may attract denial. Classification is stated as SAC 996601 with operator and SAC 9973 / 996602 without operator.