Input Tax Credit is one of the major components of Goods and Services Tax (GST) as it a mechanism by which one can pay off their output tax liability. One may wonder as to on which Goods or Services are we eligible of Input Tax Credit!

If an individual uses the Goods/ Services partially for the purpose of Business and Partially for the purpose of business is he eligible for credit of such Goods? The answer lies in Rule 42 or Rule 43 of CGST Act, 2017 where there are methods for dividing the common credits.

There are instances where in Government has decided that no credit will be allowed in few cases even if Goods/Services are wholly and solely used for Business. These are termed as Block Credits. The block credits are given in Section 17 sub-section 5.

The first component of this list is what we are going to discuss here.

The section says in no case the input tax credit shall be availed in respect of Motor Vehicles or other conveyance i.e. ITC on Motor Vehicles is blocked.

Motor Vehicle as per GST shall be as defined in the Motor Vehicle Act, 1988. It means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is  transmitted thereto from an external or internal source and includes  a chassis  to which  a body  has not been attached and a trailer; but  does not include a vehicle running upon fixed rails or a vehicle of  a special type adapted for use only in a factory or in any other enclosed  premises or  a vehicle  having less  than four  wheels fitted  with  engine  capacity  of  not  exceeding  thirty-five  cubic centimeters. Conveyance includes vessel, aircraft and vehicle.

In the author’s opinion, the reason to introduce this clause may be because nowhere it is practical that motor vehicle is used solely for business. One may use vehicle for personal consumption while at work also. In such cases, it would be very difficult distinguish between personal and business use.

This is undue hardship on people dealing in the motor vehicles, or the people who are earning wholly by means of such vehicle. Keeping this in mind Government has given following exceptions to the above rule.

  • If motor Vehicle is used for providing taxable supplies as mentioned below:
    1. Further Supply of Such Vehicle : For example, a car dealer may take the input tax credits for cars purchased for further supply even if credit of motor vehicle is blocked due to this exception.
    2. Transport of passenger : Due to this exception Tours and Travels operator will be able to take credit of motor vehicle they use. Note that, if Employer gives transport service to employee as per the contract of employment the employer shall not be eligible for credit of motor vehicle because, although there is transport of passenger there is no taxable supply.
    3. Imparting training on driving, flying, navigating such vehicle or conveyance. For example, any driving schools.
  • If Motor Vehicle is used for transportation of Goods.

Note that here there is no condition of transportation of taxable supplies. Motor vehicle used for transport of exempt goods like Books, wheat etc. the credit of motor vehicle shall be allowed. The obvious condition is that transportation shall be on account of business.

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