The scope of restriction under section 17(5) of the CGST Act was widened by placing restriction on rent-a-cab to leasing, renting or hiring of motor vehicles, vessels or aircraft from 01/02/2019. Thus, before the amendment, a registered person was allowed to avail input tax credit on leasing of motor vehicles, vessels and aircraft (other than rent a cab) when the same was used for furtherance of business. However, after the amendment, the scope of blocking has been widened to include leasing, renting or hiring of motor vehicles, vessels or aircraft.
After the amendment from 1st February 2019, section 17(5)(b) of the CGST Act disallows input tax credit on leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) of section 17(5) except when used for the purposes specified therein. This means that ITC on renting of motor vehicles would be disallowed in those cases where ITC on their purchase is also blocked. Therefore, ITC is allowed on renting of motor vehicles in the following cases:
a. Motor vehicles made for transportation of goods;
b. Vehicle for transport of passengers having approved seating capacity is more than 13 persons;
c. Vehicles for transport of passengers having approved seating capacity upto 13 persons when used for making following taxable supplies:-
- transportation of passengers; or
- providing training on driving such motor vehicles; or
- further supply of such motor vehicles
One needs to note here, that leasing, renting and hiring [Heading 9966] [Heading 9973] are not the same as passenger transportation [Heading 9964]. Input tax credit is not available only in case of renting, hiring or leasing of conveyance.
Circular No. 177/09/2022-TRU dated 03/08/2022 distinguished between transportation of passenger and renting a vehicle used for transportation. The circular clarified the following:
i. Renting of motor vehicle with operator for transport of passengers falls under Heading 9966. According to the explanatory notes to Heading 9966, the service covered here is renting of motor vehicle for transport of passengers for a period of time where the hirer defines how and when the vehicles will be operated, determines the schedules, routes and other operational considerations.
ii. On the other hand, “Passenger transport services' falls under Heading 9964. According to the explanatory notes, Heading 9964 covers passenger transport services over pre-determined routes on predetermined schedules.
Therefore, a clear distinction exists between service of transport of passengers and renting of a vehicle that is used for transport. RCM would not be applicable on Heading 9964 i.e passenger transport services.
Based on the aforesaid circular one can even conclude that input tax credit shall not be blocked for passenger transportation services. Therefore, the blockage of credit would only be applicable on the service of renting of motor vehicles and not on the services of transportation.
Allowance of ITC on renting of motor vehicles for specified use
Input tax credit on goods and services specified under section 17(5)(b)(i) shall be available if the following conditions are met:-
i. The inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply; or
ii. Input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
There was a confusion as to whether the proviso appearing after sub-clause (iii) of section 17(5)(b) of the CGST Act would be applicable to sub-clauses (i), (ii), and (iii) or only to sub clause (iii). In respect of this, Circular No. 172/04/2022-GST dated 06/07/2022 was issued by the CBIC, which clarified that the proviso after sub-clause (iii) of section 17(5)(b) was inserted based on the recommendations by the GST Council in its 28th meeting. The press note on recommendations made during the 28th meeting of the GST Council, dated 21/07/2018 clarified that “the scope of input tax credit is being widened and it would be made available in respect of goods and services which are obligatory for an employer to provide to its employees, under any law for the time being in force. Accordingly, it was clarified that, the proviso after sub clause (iii) of section 17(5)(b) would be applicable to the whole of clause (b) of section 17(5). The aforesaid circular also clarified that input tax credit shall be blocked only on leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) of section 17(5) and not on any other leasing, renting or hiring.
Examples:
1. Let’s say a person is organizing an educational training camp. For the said camp it provides various services such as conducting conference, accommodation, food and beverage and rent -a-cab. The entire service is chargeable under composite supply under SAC 9983. Here input tax credit shall be available on renting of cab by the organizers, as there is a part further supply of such service as a part of taxable composite supply.
2. Where any of the State laws obligates the mandatory pickup and drop facility for employees of a company say after 10 pm, then the ITC would be allowable in respect of such renting of such motor vehicles.
3. Where the car rental company is engaged in receipt and provision of services of car rental, full ITC would be allowable on availment of such rental services.