ITC of Motor Vehicles used for Employee Transportation

Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, “ITC”) is one of the key features of Goods and Services Tax (GST). One of the most important features of the GST system is that the credit of tax paid at every stage would be available as set-off for payment of tax at subsequent stage.

itc-of-motor-vehicles

Section 17(5) of CGST Act, 2017 states that ITC is not available in case ofmotor vehicles and other conveyances except under specified circumstances as mentioned. In this write-up, let us discuss few AARs to analyze ITC on motor vehicles used for employee transportation.

Desk of AAR

  • Haryana Authority of advance Ruling (Advance Ruling No. HAR/HAAR/R/2018-19/04), in the case of YKK India Private Limited has pronounced that the ITC of tax paid on transportation services availed by the company for transportation of passenger shall not be eligible as the same is a blocked credit u/s 17(5)(b)(iii). 

Major stress here was given on whether the impugned services are covered by the definition of “rent-a-cab”. Since the meaning of the phrase ‘rent a cab’ is not provided in the statute, reference was made to the general meaning that cab means a vehicle along with the driver which has been taken on rent/hire for transportation purpose. Therefore, the supply of the applicant is ineligible for claiming ITC u/s 17(5) of the CGST Act.

However, after the amendment in the CGST Act, with effect from 30.08.2018, there is no restriction on hiring and renting of motor vehicles having approved seating capacity of more than thirteen persons.

  • Himachal Pradesh Authority for Advance Ruling (AAR) in case of M/s Prasar Bharathi Broadcasting Corporation of India (HP-AAR-1/2020 dated 19.05.2020), held that the employer cannot claim ITC paid on the transportation services of the employees if it is not obligatory under any law.

Section 17(5)(b) states that ITC is available on the condition that goods or services are obligatory for an employer to provide under any law for the time being in force. However, the applicant has not been able to give any law under which providing the facility of transportation to the employees is obligatory under any law. Therefore, the applicant can’t claim ITC u/s 17(5) of the CGST Act.

  • In the recent advance ruling of Maharashtra Authority in case of Tata Motors Limited [GST-ARA-23/2019-20/B-46 dated 25.08.2020], held that Input Tax Credit (ITC) is available on GST charged by the service provider on the hiring of bus/motor vehicle having a seating capacity of more than thirteen persons for transportation of employees to & from the workplace and ITC shall be restricted to the extent of cost borne by the employer. Further, no GST shall be applicable on the nominal amounts recovered for the same by employer from its employees as no supply of service.

Facts of AAR of Tata Motors Limited:

  • The applicant has engaged service providers to provide transportation facility to its employees, in non-air-conditioned bus, for commuting to/from workplace, having seating capacity of more than thirteen persons.
  • To ensure use of transportation facility only by authorized persons/employees, the applicant had issued pass to employees and nominal amount was recovered on monthly basis. In other words, difference between amount paid to service provider and amount recovered from employees is cost to company as salary cost.

Questions raised before the authority:

The applicant has sought an advance ruling in respect of the following questions:

  1. Whether ITC is available to applicant on GST charged by service provider on hiring of bus/motor vehicle having seating capacity of more than thirteen person for transportation of employees to & from workplace?
  2. Whether GST is applicable on nominal amount recovered by applicant from employees for usage of employee bus transportation facility in non-air-conditioned bus?
  3. If ITC is available as per question no. (1) above, whether it will be restricted to the extent of cost borne by the applicant (employer)?

Held:

For the first question,

  • Considering the ambit of section 16 & section 17(5) of the CGST Act had clearly debarred ITC on motor vehicles or conveyances used in transport of passengers. However, with effect from 01.02.2019, ITC has been allowed on leasing, renting, or hiring of motor vehicles, for transportation of persons, having approved seating capacity of more than thirteen persons.
  • Held that applicant was using motor vehicles having approved seating capacity of more than thirteen persons, the applicant shall be eligible for ITC w.e.f. February 01, 2019.

For the second question,

  • Since the Applicant is not supplying any services to its employees, in view of Schedule III,Services by an employee to the employer in the course of or in relation to his employment shall he treated neither as a supply of goods nor a supply of services, GST is not applicable on the nominal amounts recovered by the Applicants from their employees.

For the third question,

  • The jurisdictional officer& the applicant, citing the decision of CCE. Nagpur vs Ultratech Cement Ltd. [2010 (260) ELT 369 (Bom.)], it was held that ITC is not admissible to applicant on part of cost borne by employee and thus ITC will be restricted to the extent of cost borne by the applicant.
  • Member of the AAR Bench agreed with the citied vision.

This content is meant for information only and should not be considered as an advice or legal  opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

Posted by:

CA Tarun Kapoor

AKGVG & Associates

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