Top Stories ITC on Motor Vehicles: Avoid Costly Mistakes and Claim it Right A complete guide to understanding ITC on motor vehicles under GST, including eligibility, restrictions, demo vehicle ITC rules, and tax-saving alternatives for businesses. By Kavi Priya – On February 15, 2025 10:55 am – 5 mins read Introduction This article is for business owners, especially those who have purchased a vehicle or are planning to buy one. A common question that many business owners have is: When I buy a vehicle, how does GST apply to it? Can I claim an Input Tax Credit (ITC) on it? Let’s take an example. Suppose you purchase a car worth Rs. 30 lakh. GST at 28% is applied to it, along with other charges like cess and registration fees.

As a result, while the base price of the car is Rs. 30 lakh, the final cost after taxes and additional charges can go up to Rs. 50 lakh. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here It is important to understand whether you can claim ITC on the GST paid, and if not, what alternative tax benefits you may have. ITC on Motor Vehicles – Eligibility and Restrictions When ITC on Motor Vehicles is Not Allowed As per Section 17(5) of the CGST Act, ITC is not available for motor vehicles used for personal or business transportation if the seating capacity is 13 or fewer persons, including the driver. This applies to cars, SUVs, and other passenger vehicles, regardless of whether they are purchased in the name of the business. Examples of Ineligible ITC Claims A law firm purchases a sedan for its partners’ official use. ITC cannot be claimed because the vehicle is not used for an eligible business activity. A software company buys a car for its directors’ travel between offices. ITC is not allowed as it is a passenger vehicle used for internal business transport. A manufacturing company purchases a car for senior management’s site visits. ITC cannot be claimed since the vehicle is not used for eligible business operations.

When ITC on Motor Vehicles is Allowed Despite these restrictions, ITC can be claimed if the vehicle is used for specific business activities as listed under Section 17(5) of the CGST Act. Eligible Cases for ITC on Motor Vehicles 1. Vehicles Used for Further Supply (Dealerships, Resellers, Leasing Businesses) ITC is allowed if the business is involved in the sale, leasing, or renting of motor vehicles. Example: A car dealership purchases 50 cars for resale. The GST paid on these cars can be claimed as ITC. 2. Vehicles Used for Passenger Transport Services ITC is allowed if the vehicle is used for transporting passengers as a taxable service. Example: A tour operator purchases a 20-seater minibus for inter-city passenger transport. The GST paid on this purchase can be claimed as ITC. 3. Vehicles Used for Driver Training Schools ITC is available when vehicles are used by driving schools for training purposes. Example: A driving school buys hatchback cars for student training. The GST paid on these cars can be claimed as ITC. 4. Vehicles Used for Goods Transportation Trucks, lorries, and other vehicles used for transporting goods qualify for ITC. Example: A logistics company purchases trucks for transporting goods between warehouses.

The GST paid can be claimed as ITC. 5. Vehicles Used by Manufacturers and Insurance Companies ITC is available if motor vehicles are used in business operations like product testing or insurance claims processing. Example: A car manufacturer purchases vehicles for testing new models. ITC can be claimed as part of the manufacturing process. ITC on Motor Vehicle-Related Expenses In addition to the purchase of vehicles, businesses incur costs related to insurance, servicing, repairs, and maintenance. ITC on these expenses is also restricted unless the vehicle itself is eligible for ITC. When ITC on Motor Vehicle-Related Expenses is Not Allowed 1. General Insurance Premiums ITC is not available on insurance for ineligible vehicles. Example: A business pays insurance for a company-owned car used by employees. ITC cannot be claimed.   2. Servicing, Repairs, and Maintenance ITC is blocked unless the vehicle is used in an eligible business activity. Example: A company spends GST on car servicing for executive travel.

ITC is not allowed. When ITC on Motor Vehicle-Related Expenses is Allowed 1. If the Business is in Vehicle Manufacturing or Insurance Services ITC can be claimed on insurance, repairs, and maintenance if the business is engaged in vehicle manufacturing or insurance services. Example: An insurance company purchases vehicles for claim inspections. ITC is allowed. 2. If the Vehicle Itself is Eligible for ITC If ITC was originally claimed on the vehicle purchase, then ITC on insurance, repairs, and maintenance can also be claimed. Example: A tour operator purchases a bus for passenger transport. Since ITC was allowed on the bus purchase, ITC on maintenance costs can also be claimed. Alternative Tax Benefits If ITC is Not Allowed If a business cannot claim ITC on a vehicle purchase, an alternative tax benefit is available through depreciation under the Income Tax Act. How Depreciation Works as a Tax Benefit

1. If ITC is Claimed on GST Depreciation is claimed only on the ex-GST cost of the vehicle. Example: If a vehicle costs Rs. 30 lakh and GST is Rs. 8.4 lakh, depreciation is calculated on Rs. 30 lakh. 2. If ITC is Not Claimed on GST Depreciation is claimed on the total cost, including GST. Example: If the total cost (including GST) is Rs. 50 lakh, depreciation is calculated on the full Rs. 50 lakh. ITC provides immediate tax relief but depreciation allows businesses to recover the cost of the vehicle over time. Businesses that cannot claim ITC should ensure they include GST as part of the asset cost for depreciation calculations. ITC for Demo Vehicles 1. ITC is Allowed for Authorized Dealers: Since demo vehicles are essential for the sale of motor vehicles, they are considered part of the supply process. The recent GST circular clarifies that ITC on demo vehicles is allowed for authorized dealers, as they fall under the “further supply of such motor vehicles” exception. Example: A car dealer purchases a demo vehicle for Rs. 20 lakh and pays Rs. 5.6 lakh GST (28%) on the purchase. Since this vehicle is used to promote sales, the dealer can claim ITC of Rs. 5.6 lakh while filing GST returns. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here 2. Impact of Capitalization of Demo Vehicles on ITC: The capitalization of demo vehicles in accounting records does not affect ITC eligibility, as long as ITC has not been claimed as depreciation under the Income Tax Act.

If the dealer does not claim depreciation on the GST component, ITC is allowed. If the dealer claims depreciation on the GST component, ITC cannot be claimed. Example: A dealer purchases a demo car for Rs. 20 lakh and pays Rs. 5.6 lakh GST. If the dealer capitalizes only the Rs. 20 lakh vehicle cost and claims ITC on Rs. 5.6 lakh GST, it is allowed. If the dealer includes Rs. 5.6 lakh GST in the asset value and claims depreciation on it, ITC is not allowed. 3. ITC is Not Allowed for Dealers Acting as Agents: The circular also distinguishes between: Authorized dealers engaged in vehicle resale (ITC allowed). Dealers acting as marketing agents for manufacturers (ITC not allowed). Some dealers do not directly purchase or sell vehicles but act as agents or facilitators for vehicle manufacturers. These dealers only provide test drive facilities and do not raise invoices in their own name. Since they do not make further supply of vehicles, they cannot claim ITC on demo vehicles. Example: A car dealer directly purchases and sells vehicles → ITC is allowed. A marketing firm provides test drive services for a manufacturer but does not buy or sell vehicles → ITC is not allowed