GST Updates

Input Tax Credit of GST paid on motor vehicle not allowed: Is it so

Non-availability of Input Tax Credit on Motor Vehicle and Conveyance has been a serious matter of debate since GST Law has taken shape. Twitter handle of government is flooded with queries whether Input Tax Credit would be available on motor vehicle and conveyance.

  • Let’s first take an example and understand the situation and why there is so much grievance:
  1. Vinod is a solely engaged in supply of Kirana Items and is not engaged in the business of supply of car.
  2. He purchases a car for Rs 10 Lakh on 2nd July 2017, after paying GST @ 28% of Rs 2.80 Lakh and supposedly pays compensation cess @ 15% i.e. 1.5 Lakh.
  3. He is advised by his consultant that as he is not making any further taxable supply of car but engaged in supply of Kirana Items, he would not be eligible for availing credit of the tax paid on purchase of car.
  4. Mr Vinod is fumed and someone also provides him with the opinion of the Government Twitter portal, which also says the same. He sits down and keep himself calm as he has no other option.
  5. As the things go, Mr Vinod is also not satisfied with his new car and he wants to sell the car again and buy a new car. On July 28, 2017, he finds a customer and sells the car at 9.50 Lakh.
  6. As soon as he finalizes the buyer, he remembers reading somewhere that he would have to pay the tax @ 28% and Compensation Cess @ 15% on car sold by him. He asks his consultant and he also approves the same. He also searches opinion of the government on Twitter Portal and twitter portal also gives the same opinion, he has to pay tax on the sale of car.
  7. Mr Vinod is now unable to keep down his emotions. He approaches his consultant and says, I had paid taxes to the tune of 4.30 Lakh on purchase of car in July 2017 and now in the same month I want to sell the car as I do not like the car, government is again asking me to pay tax to the tune of Rs 4.09 Lakh i.e. (GST-2.66 Lakh and Compensation Cess-1.43 Lakh) without any credit of the taxes given to me.

 

S. No.ParticularValueGSTCompensation Cess
1.Purchase of Car10 Lakh2.80 Lakh1.50 Lakh
2.Sale of Car9.5 Lakh2.66 Lakh1.43 Lakh
Total Taxes paid or collected by Vinod5.46 Lakh2.93 Lakh

 

Thus, government has collected whopping 8.39 Lakh from Mr. Vinod on a car which has initially priced at Rs 10 Lakh. Just imagine, if it changes hands once more, the tax collected on the vehicle would be more than the value of the vehicle. !!!!!

Does the law intends to collect tax which is more than 100% of the original sale value till the vehicle is written off. How far it is practical and feasible.

So let’s analyse whether credit on motor vehicle is available or not and how far it’s correct to conclude that Input Tax Credit should not be allowed to any registered person under the Act.

  • Restriction on Input Tax Credit on Motor Vehicle:

Lets first analyses Section 17(5) of CGST Act, 2017 for the same:

Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(a) motor vehicles and other conveyances except when they are used––

(i) for making the following taxable supplies, namely:—

(A) further supply of such vehicles or conveyances ; or

(B) transportation of passengers; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

Thus, section makes it clear that Input Tax Credit on motor vehicles would not be allowed unless they are used for making further taxable supplies namely further supply of such vehicles or conveyances, transportation of passengers or imparting training.

 

  • Levy of Tax at the time of sale of Motor Vehicle:

Now second limb of the transaction is that any registered person, who has purchased motor vehicle and capitalized the same, he would have to collect tax as and when he sells the vehicle as the supply of vehicle has been made by him in the course or furtherance of business.

 

  • Whether at all credit is restricted in cases where tax would be levied on supply of motor vehicle

(a) Lets conclude all the points in sequence once again:

  1. Mr Vinod purchases car in July 2017.
  2. He capitalizes the car in his balance sheet as he would be using car for his business.
  3. He sells the car in the July 2017 as he does not like the car.
  4. He levies tax at the time of supply of car as it was used in the course or furtherance of business.

(b) Questions arising out of the Transactions:

  1. Whether further taxable Supply of such motor vehicle has been made:  Yes, as tax has been levied at the time of further supply of motor vehicle by Mr. Vinod.
  2. Whether tax was paid at the time of purchase of car: Yes

 

  • Credit should be allowed of taxes paid at the time of purchase of motor vehicle

Now the question here arises is that if law mandates a registered person to levy tax at the time of sale of motor vehicle, then whether it would not be deemed that further taxable supply of such motor vehicle has been made and credit should be allowed for the taxes paid at the time of purchase of motor vehicle.

It has to be borne into mind that no where section 17(5) uses the condition that registered person should be engaged in making supply of the vehicle on a regular basis. The sole condition which has been provided is that there should be further taxable supply of such motor vehicle.

Conclusion: Therefore, if a registered person who has purchased any vehicle as part of his business and which has been capitalized by him in his balance sheet, has to charge tax at the time of sale of such vehicle, then the part of condition which provides further taxable supply of such vehicle is fulfilled and credit has to be allowed of the taxes paid at the time of purchase of vehicle.

2 Comments

2 Comments

  1. Avatar

    CA LALIT TALESARA

    July 28, 2017 at 8:51 am

    Totally agree Arpit Ji and I was also of same view.

  2. Avatar

    CA MinKal Gupta

    July 29, 2017 at 8:55 pm

    Lets take another example:
    Suppose i purchase the car for 10,00,000.00 today and pay tax 28+15=43% (4,30,000.00) and after 2 years i want to sell it for 5,00,000.00 and i have to pay gst 43% (2,15,000.00) now if input at the time of purchase is allowed, whether excess input of 2,15,000.00 is allowed to set off against my other supplies or It will lapse…..??

    Kindly Clarify…..

Leave a Reply

Your email address will not be published. Required fields are marked *

To Top