Block Credit - Motor Vehicle [section 17(5)(a),(aa),(ab) of CGST Act] - GST Ready Reckoner - GST

Block Credit - Ineligible for ITC Section 17(5) of CGST Act , also referred to as blocked credits, is a very important provision for every regular taxpayer under GST. It defines a list of purchases on which GST is paid but businesses cannot claim these as the Input Tax Credit (ITC). In this article, we take you through the latest clause-by-clause analysis of Section 17(5) of CGST Act or ineligible ITC with examples. Section 17(5) of CGST Act , Notwithstanding anything contained in section 16(1) and 18(1) of CGST Act, input tax credit shall not be available in respect of the following, namely:- Clauses (a) Input tax credit on purchase of Motor Vehicle :- motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:- (A) further supply of such motor vehicles; or (B) transportation of passengers; or (C) imparting training on driving such motor vehicles; In Other Words :- ITC Available without any restriction in the following cases in respect of purchase of motor vehicle - If motor vehicle purchase use for transportation of goods - If motor vehicles purchased for transportation for passenger , if approved seating capacity ( including driver ) is more than 13 - If motor vehicles purchased for transportation for passenger , if approved seating capacity ( including driver ) is 13 or less, If motor vehicle use only for further making taxable supply (a) Further supply of such motor vehicle like renting or lease services , automobile shop, showrooms, or manufacturing establishment (b) Transportation of passenger (c) Training and driving on such motor vehicle. Important Clarification Clarification on availability of input tax credit in respect of demo vehicles [ Circular No. 231/25/2024-GST Date 10.09.2024 ] Issue :- The demo vehicles are the vehicles which the authorised dealers for sale of motor vehicles are required to maintain at their sales outlet as per dealership norms and are used for providing trial run and for demonstrating features of the vehicle to the potential buyers. Clarification:- As demo vehicles are used by authorized dealers to provide trial run and to demonstrate features of the vehicle to potential buyers, it helps the potential buyers to make a decision to purchase a particular kind of motor vehicle. Therefore, as demo vehicles promote sale of similar type of motor vehicles, they can be considered to be used by the dealer for making further supply of such motor vehicles . Accordingly, input tax credit in respect of demo vehicles is not blocked u/s 17(5)(a) of CGST Act , as it is excluded from such blockage in terms of sub-clause (A) of the said clause . Issue :- where the authorized dealer merely acts as an agent or service provider to the vehicle manufacturer for providing marketing service, including providing facility of vehicle test drive to the potential customers of the vehicle on behalf of the manufacturer and is not directly involved in purchase and sale of the vehicles. Clarification :- In such a case, the authorized dealer is merely providing marketing and/or facilitation services to the vehicle manufacturer and is not making the supply of motor vehicles on his own account. Therefore, the said demo vehicle cannot be said to be used by the dealer for making further supply of such motor vehicles. Accordingly, in such cases, input tax credit in respect of such demo vehicle would not be excluded from blockage in terms of sub-clause (A) of section 17(5)(a) of CGST Act and therefore, input tax credit on the same would not be available to the said dealer. Issue:- T he demo vehicles are used by the authorized dealers to promote further sale of motor vehicles of the similar type and therefore, such vehicles appear to be used in the course or furtherance of business of the authorized dealers. Where such vehicles are capitalized in the books of accounts by the authorized dealer, the said vehicle falls in the definition of capital goods under section 2(19) of CGST Act . Clarification :- a recipient of goods is entitled to take input tax credit in respect of tax charged on the inward supply of any goods, which as per definition of goods under section 2(52) of CGST Act , includes even capital goods. Further, section 2(19) of CGST Act also recognizes that capital goods are used or intended to be used in the course or furtherance of business. Accordingly, availability of input tax credit on demo vehicles is not affected by way of capitalization of such vehicles in the books of account of the authorized dealers, subject to other provisions of the Act. in case of capitalization of demo vehicles, availability of input tax credit would be subject to provisions of section 16(3) of CGST Act , which provides that where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the Income-tax Act, 1961 , the input tax credit on the said tax component shall not be allowed. It is further mentioned that in case demo vehicle, which is capitalized, is subsequently sold by the authorized dealer, the authorized dealer shall have to pay an amount or tax as per provisions of section 18(6) of CGST Act read with rule 44(6) of the Central Goods and Service Tax Rules, 2017 . clauses (aa) Vessels and aircraft - If vessels and aircraft purchased and used for transportation of goods , input tax credit can availed without any restriction. - If vessels and aircraft purchased for transportation for passenger, input tax credit can availed with restriction. If vessels and aircraft use for making taxable supply Further Supply of ships, vessels or aircraft Passenger transportation service or plane service or cruise or boat rental service Imparting training and navigating vessels Imparting training or flying aircraft or planes Other than above mentioned use, no ITC available on vessels aircraft. Clauses (ab) Notified services of such motor vehicles and vessels or aircraft. Following notified services used for such motor vehicle and vessels or aircraft - General insurance Servicing Repair maintenance Leasing ,Renting, Hiring [covered in clause (b)] If motor vehicle, vessel, aircraft is manufacturer s final product, ITC of notified services is available. If ITC of motor vehicle, vessel, aircraft available in Clause (a) and clause (aa) of section 17(5) used in the business, then ITC of notified services is available. Whether tax paid on repairs, maintenance and insurance of Motor Vehicles used for the purpose of business is eligible for ITC? [ Refer FAQ Qus. 41 ] The ITC on repairs, maintenance and general insurance of those motor vehicles is blocked if the ITC is blocked under Section 17(5)(a) of the CGST Act 2017 . Motor Vehicles for transportation of Goods:- ITC on repairing, maintenance and insurance of motor vehicles for transportation of goods is admissible with no restrictions. Motor Vehicles for transportation of persons:- Thus, ITC on repairing, maintenance and insurance of motor vehicles for transportation of persons carrying more than 13 persons will be admissible. However, for motor vehicles for transportation of persons carrying up to 13 persons will be admissible only if it is used for transportation of passengers, further supply of such motor vehicles and imparting training on driving. [ Section 17(5)(ab) as substituted vide the CGST (Amendment) Act, 2018 ] Important Notification and Circulars 1. Issue - The insurance companies, which are engaged in providing general insurance services in respect of insurance of motor vehicles, insure the cost of repairs/ damages of motor vehicles incurred by the policy holders and settle the claims in two modes i.e., Cashless or Reimbursement. [ Circular No. 217/11/2024-GST Dated 26.06.2024 ] Clarification - 1. Under both modes of settlement, the insurance company accounts for repair liability (as assessed by the Surveyor/ Loss Assessor) as claim cost and is liable to make payment of approved repair charges to the garage. In both the cases, the invoices are generally issued by the garages in the name of Insurance companies. - In case of Cashless Mode , the insurance companies directly make the payment of approved repair charge to the Network Garage, - In case of Reimbursement mode , the payment is first made by the Insured to the Non-Network Garage, which is subsequently reimbursed by the insurance company to the Insured, to the extent of approved repair/ claim cost. The insurance companies may be availing input tax credit (ITC) on the tax paid in respect of such repair services provided by the garages in Cashless Mode of claim settlement as well as in Reimbursement Mode of claim settlement on the basis of the invoices issued by the garages in the name of Insurance company 2. In case of reimbursement mode of claim settlement, some field formations are raising objections on availment of ITC by insurance companies in respect of repair invoices issued by the non-network garages on insurance companies. - It is being claimed by the said field formations that in case of reimbursement mode of claim settlement, there is no credit facility offered by the garages to the Insurance Companies and therefore, the supply of repair service is made by the garage to the insured and not to the insurer. - Accordingly, it is being claimed that ITC of repair invoices, in such cases, should not be available to the insurance companies. 3. Various clarification has been issued by CBIC on the availability of ITC in respect of repair expenses incurred in case of reimbursement mode of claim settlement. Examples - Example 1:- Star car Pvt. Ltd. a car manufacturer purchased a tempo traveler (seating capacity of 15 persons for the transport of its employees within the factory premises. can Star car Pvt. Ltd. avail ITC on such purchases? In this case, Star car Pvt. Ltd. will be able to availed the ITC as tempo have sitting capacity more than 13 person . Example 2:- Kapil dairy uses tempo services for delivery of its milk product. in this case as supply of milk products is in course of business. Thus here ITC will be allowed as it is used for transportation of goods which is not covered in blocked credit under section 17(5) of CGST Act. Example 3:- Mr. Ramesh Tour Travel, purchase a car having capacity of 5 person for the Transportation of passenger, can be availed ITC or not. In this case, as per section 17(5)(a), if motor vehicle capacity is less than 13 person, but used for transportation of passenger than Mr. Ramesh Tour Travel can availed the ITC of car purchase. Example 4:- M/s Rupa Pvt. Ltd. purchased a truck used for goods transportation in factory and car used bus used for employees transportation seating capacity 10 person including driver. In the given case, First case motor vehicle is used for transportation of goods which is in course of business it is not specifically mentioned in section 17(5)(a) and M/s Rupa Pvt. Ltd. can availed ITC on purchase of truck used for transportation of goods, secondly case, as per section 17(5)(a) less than 13 capacity motor vehicle, ITC available on for the used for transportation of passenger, or Further supply of such motor vehicle or Training and driving of such motor vehicle, in this case car bus is less than 13 person capacity used for employees transportation, it is not fall under the condition mention as per mentioned in section 17(5)(a). so ITC cannot availed in this case. Example 5:- Indigo air purchase aircraft for transportation of passenger as well as used for imparting navigation training to pilots in this case, Indigo air can availed ITC as per section 17(5)(aa), because aircraft used for transportation of passenger and imparting navigation training and it is fall under condition mention in the provision. Example 6:- Jassi Roadlines provides GTA services, has renewed the truck general insurances which is used for transportation of goods. In this case, as per section 17(5)(ab) of CGST Act, notified specified services allowed for ITC, on which ITC claimed at the time of purchased according to section 17(5)(a) and (aa). therefore Jassi Roadline can availed ITC on the general insurances of truck, which used for the transportation of goods.