Analysing ITC on Commercial Vehicles under GST

Bio

Sandipan Mitra is the CEO and co-founder of Pice. He boasts eight years of experience in the B2B and fintech sector. Sandipan's journey includes significant roles at multiple Indian Unicorns Including Product at PayU, and as founding member / VP, Product at Open Financial Technologies.

24 Sep 24
9 mins

Sandipan Mitra

08 Mins
24-09-24

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Table of Contents

Understanding Input Tax Credit (ITC)
Definition of Motor Vehicles Under GST
GST Regulations for Commercial Vehicles
Claiming ITC on Commercial Vehicles
Eligibility Criteria for ITC on Commercial Vehicles
Effect of GST on Car Pricing
GST Rules for Vehicle Rentals and Leases
Advantages of GST on Commercial Vehicles
Challenges in Implementing GST for Commercial Vehicles
The Bottom Line

Input Tax Credit (ITC) allows businesses to offset the tax paid on vehicle purchases and maintenance against output tax payable.
ITC claims on commercial vehicles are restricted for passenger vehicles with less than 13 seats but have exceptions for specific business uses.
GST rates on vehicles range from 12% to 28%, depending on the type and use of the vehicle.
Electric vehicles benefit from a significantly lower GST rate of 5%, down from the pre-GST rate of 20.5%.
The introduction of GST has reduced tax evasion, streamlined paperwork with e-way bills, and improved logistics for businesses.

Implementing Goods and Services Tax has significantly transformed the indirect tax structure in India. It has now become essential to understand the intricacies of ITC under GST for businesses using commercial vehicles. ITC allows you to offset the tax you pay on input services, including the purchase and maintenance of vehicles against output tax payable.

In this blog, we will discuss ITC and GST input on commercial vehicles to understand the rules and regulations better.

Understanding Input Tax Credit (ITC)

Input Tax Credit refers to the Goods and Services Tax (GST) that a taxpayer pays on the purchase of goods and services that will be put to use for the furtherance of business. The taxpayer can reduce the ITC from the GST that he is required to pay on a sale transaction by fulfilling certain conditions.

Definition of Motor Vehicles Under GST

The term 'motor vehicle' does not have a clear definition under the GST law yet. However, according to the Motor Vehicles Act of 1988, a motor vehicle can be defined as “any mechanically propelled vehicle used on roads but does not include a vehicle running on fixed rails or a special vehicle used in a factory or an enclosed premises having less than four wheels with engine capacity not exceeding 25 cubic centimetres.”

It is important to note that as per Notification No.29/2019 dated 31.12.2019 motor vehicle refers only to those vehicles which are designed to carry passengers.

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GST Regulations for Commercial Vehicles

Take a look at the table below to understand the GST rates on vehicles:

Type of Vehicle	Rate of GST
Self-loading trailers or self-unloading trailers which have agricultural used	12%
Tractors for semi - trailers (except road tractors) with engine capacity of more than 1800cc	12%
Vehicles for transportation of goods	28%
Motor vehicles with a seating capacity of 10 or more people, including drivers	28%
Motorcycles’s accessories and parts, including sidecars	28%
Mopeds and motorcycles, irrespective of sidecars	28%

Claiming ITC on Commercial Vehicles

Section 17(5) of ITC restricts claiming ITC on the purchase of passenger motor vehicles with a provision of seating capacity of less than 13 people (including the driver) and are used for transportation. However, here are a few exceptions:

ITC is available on the taxable supplies of motor cars where the registered person is a part of the business of these motor vehicles.
ITC is available on supply of motor vehicle for transport of passengers if the taxable person is a part of this business of transportation.
Training schools can claim exemption on motor cars used for driving purposes.

Input Tax Credit is available for services like repair on vehicles and maintenance services, motor vehicle insurance and more if the person is a motor vehicle dealer or supplies insurance services concerning such motor vehicles.

Eligibility Criteria for ITC on Commercial Vehicles

These are the eligibility criteria you need to meet for claiming ITC on commercial vehicles:

Transportation of Goods: You are eligible for Input Tax Credit if you are using a motor vehicle to transport goods. Vehicles like trucks for transportation, tempos, dumpers, JCBs, etc. are included in this.
Transportation of Persons: If you run a business and acquire a car for transportation of employees or transportation of passengers having a seating capacity of 13 or more (including driver), you can claim ITC.

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Effect of GST on Car Pricing

Here is a table for you to better understand the Goods and Services Tax rate on car pricing:

SL. No.	Car Segment	Capacity of Engine	Tax Rate (Pre-GST)	GST Rate (Post-GST)	Difference
1.	Small vehicles	Lesser than 1200cc	28%	18%	10%
2.	Mid-size vehicles	Range between 1200cc and 1500cc	39%	18%	21%
3.	Luxury cars	More than 1500cc	42%	28%	14%
4.	SUV	Greater than 1500cc	45%	28%	17%
5.	Electric vehicles	NA	20.5%	5%	15.5%

The applicable GST rate on small cars like Maruti Suzuki Swift, Tata Tiago, etc. is 18%. Before GST implementation, the applicable tax rate was 28%.

Mid-size vehicles like Tata Nexon, Maruti Baleno, etc. attract a much lower tax rate of 18% as compared to 39%.

Luxury cars like Land Rover, Lamborghini, etc. attract a tax rate of 28% instead of 42% which was applicable in the earlier tax regime.

Tax rates on SUVs like Jeep Compass, Renault Duster, etc. have decreased to 28% from 45%.

Before GST implementation, the tax rate on electric vehicles was 20.5%. Under GST, the total tax applicable on electric cars is 5%.

Let us look at this table to understand the cess which is applicable in addition to GST on cars:

Sl. No.	Car Segment	Capacity of Engine	GST Rate	Cess
1.	Small vehicles	Lesser than 1200cc	18%	1%
2.	Mid-sized cars	Range between 1200cc and 1500cc	18%	3%
3.	Large vehicles	Greater than 1500cc	28%	20%-22%

GST Rules for Vehicle Rentals and Leases

There are two rates of GST which are applicable in renting vehicles:

With full Input Tax Credit: 12%
With Limited Input Tax Credit: 5%

The reverse charge mechanism applies to renting motor vehicles which are passenger transport vehicles, provided the supplier meets these conditions:

The supplier is the provider of these services to a body corporate.
The supplies are anyone except for the body corporate.
The supplier does not levy a GST of 12% on the invoice from the recipient of the service.

Advantages of GST on Commercial Vehicles

Here are a few advantages of the applicability of GST on commercial vehicles:

Decrease in Tax Evasion: GST implementation has made it challenging for businesses to evade taxes and use unfair means. Moreover, under GST, the Government can keep better track of the transfer of goods and services.
Less Paperwork: The physical bill has been replaced by an e-way bill. Under GST, there is less requirement for paperwork as most can be done digitally.
Better Logistics: Under GST, there has been a considerable improvement in logistics. It has also made the inter-state supply of goods and services easier.

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Challenges in Implementing GST for Commercial Vehicles

These are the challenges in implementing Goods and Services Tax for commercial vehicles:

Higher Cost of Compliance: Under GST, there are many compliance requirements such as filing returns, collection and depositing of GST and more. Thus, the compliance cost is also high.
Complexities of GST Laws: The laws of GST can be complex for some. For instance, small business owners may find it challenging to understand and comply with GST laws.

The Bottom Line

It is crucial to understand the GST input on commercial vehicles for both businesses and individual taxpayers. By understanding the eligibility to claim Input Tax Credit, you can not only optimise tax savings but also decrease tax burden.

FAQs

Can we take GST input on a commercial vehicle?

Yes, businesses can claim Input Tax Credit (ITC) on commercial vehicles used for transporting goods or passengers, provided they meet specific conditions. For example, ITC is available for vehicles with a seating capacity of 13 or more, including the driver, or when the vehicle is used directly for business purposes like transportation services. Restrictions apply to passenger motor vehicles with less than 13 seats unless they are used for specific purposes like transport services.

Is GST input available on vehicle purchase?

GST input can be claimed on the purchase of a vehicle if it is used for business purposes, such as transporting goods or passengers. However, ITC on vehicles is restricted for passenger vehicles with less than 13 seats, unless they are used for specific business activities like training or transportation services. Certain vehicle dealers or businesses related to vehicle sales and services can also claim ITC.

Is there GST on used commercial vehicles?

Yes, GST applies to the sale of used commercial vehicles, but the rate may vary depending on the condition of the vehicle and the nature of the sale. GST on used vehicles is typically calculated on the difference between the selling price and purchase price, making the tax burden lower for used vehicles compared to new ones.

Can we claim ITC on commercial vehicle repairs?

ITC is available on services related to the repair and maintenance of commercial vehicles, provided they are used for business purposes. For businesses engaged in the transportation of goods or passengers, costs associated with vehicle servicing, insurance, and repairs can be claimed under ITC, helping reduce the overall tax burden.

Can I claim ITC on tractor purchase?

ITC can be claimed on the purchase of a tractor if it is used for business purposes, such as in agriculture or transportation. Tractors used for agricultural activities are taxed at a lower GST rate (12%), and businesses engaged in these activities are eligible to claim ITC on the tractor's purchase, provided all conditions are met.

How much GST on commercial transport?

The GST rate on commercial transport vehicles typically ranges from 12% to 28%, depending on the vehicle type and use. For example, vehicles used for transporting goods are taxed at 28%, while specific trailers and agricultural vehicles like tractors are taxed at 12%.

Which vehicle is ineligible for ITC?

Passenger vehicles with a seating capacity of less than 13, including the driver, are generally ineligible for ITC unless used for specific business activities like providing transportation services, training, or vehicle sales. Personal use vehicles and vehicles not directly involved in business operations are also excluded from ITC claims