Businesses, startups, professionals, and business owners often choose to buy cars for their businesses. But one query comes to mind after paying the GST for the vehicle – whether the GST paid on the vehicle can be claimed as Input Tax Credit (ITC)?
The answer isn’t as simple as one would think. In the GST regime, motor vehicles are a particular type of ‘blocked credit’. Although purchasing cars is liable to GST, there are several requirements to claim ITC on buying a car. Knowing the regulations can help you make improved choices and avoid any compliance issues.
In this article, we will explore all the information related to GST on car purchase, ITC applicability, exceptions, necessary documents, and compliance related considerations.
What is ITC Under GST?
One of the most important features of the GST system is the Input Tax Credit.
ITC allows registered taxpayers to obtain credit in respect of the GST charged on the acquisition of goods in the course and furtherance of business. This credit can then be set off against the amount of GST to be paid on supplies of goods & services made outward.
For instance, where a business pays GST on office equipment, professional services, software subscriptions or raw material, the GST paid may be claimed as ITC (subject to the eligibility conditions).
But ITC aims to avoid cascading taxes and impose taxes only on the value added.
But the GST law has provided for a number of exceptions where ITC cannot be availed on certain goods and services like many passenger motor vehicles.
GST Provisions Governing ITC on Cars
The primary provision governing ITC on car purchase is Section 17(5)(a) of the CGST Act, commonly referred to as the “Blocked Credit” provision.
According to this section, ITC is not available on motor vehicles used for transportation of persons having an approved seating capacity of up to13 persons, including the driver, except in specified circumstances.
This means most passenger cars, sedans, hatchbacks, SUVs, and executive vehicles generally fall within the blocked-credit category.
The law focuses primarily on the purpose for which the vehicle is used rather than merely who owns it.
Can ITC Be Claimed on Purchase of a Car?
In most situations, businesses cannot claim ITC on passenger cars purchased for general business operations.
Examples include:
- Director or executive transportation
- Employee commuting
- Administrative use
- Corporate travel
- Personal or mixed-use vehicles
Even if the vehicle is purchased in the name of the company and used for business-related travel, ITC may still be blocked if it falls within the restricted category under Section 17(5).
Therefore, merely purchasing a vehicle for business does not automatically make the GST paid eligible for ITC.
The intended use of the vehicle becomes the deciding factor.
Cases Where ITC on Car Purchase is Allowed
Although ITC on passenger vehicles is generally restricted, GST law provides several important exceptions.
1. Further Supply of Vehicles
Businesses engaged in selling motor vehicles can claim ITC on vehicle purchases.
Examples include:
- Automobile dealerships
- Vehicle distributors
- Vehicle trading businesses
Since the vehicles are acquired for resale, ITC remains available.
2. Transportation of Passengers
Businesses that use vehicles for passenger transportation services who can claim ITC include:
- Taxi operators
- Cab service providers
- Tourist transport businesses
- Employee transportation service providers
The vehicle serves as a core business asset generating taxable supplies.
3. Imparting Driving Training
Driving schools can claim ITC on vehicles used for driver training purposes.
Since the vehicle is directly involved in delivering taxable training services, the GST paid becomes eligible for credit.
4. Leasing and Rental Businesses
Where vehicles are used as part of a taxable leasing or rental business model, ITC may be available subject to the applicable GST provisions and nature of outward supplies.
Businesses should evaluate specific facts and seek professional advice where required.
ITC Eligibility Based on Seating Capacity
One of the most important factors determining ITC eligibility is seating capacity.
Vehicles with Seating Capacity up to 13 Persons
These vehicles are generally covered by the blocked-credit provisions.
Examples include:
- Sedans
- Hatchbacks
- SUVs
- Most luxury cars
- Executive vehicles
ITC is generally unavailable unless the vehicle is used for one of the specified exceptions.
Vehicles with Seating Capacity Exceeding 13 Persons
Vehicles designed to carry more than 13 persons (including the driver) generally fall outside the passenger vehicle restriction.
Few of them are:
- Staff buses
- Tourist coaches
- Institutional transport buses
Businesses using such vehicles in the course of business may be eligible to claim ITC, subject to other GST conditions.
ITC on EVs
Electric vehicles (EVs) have become a huge hit among corporate entities that want to find a sustainable way of transportation.
There is a concessional GST rate of 5% on electric vehicles at the moment, so they are more tax-efficient to purchase than many of the conventional vehicles.
But there is not much change in the rules that regulate ITC on the purchase of cars.
An electric vehicle bought to be used in executive transport or as a general office car is generally under the same blocked-credit as a standard passenger car.
ITC may be available if the EV is used for:
- Passenger transportation services
- Vehicle leasing
- Driver training
- Further supply
Therefore, businesses should evaluate both GST rates and ITC eligibility before making purchasing decisions.
ITC on Car-Related Expenses
Businesses often incur recurring expenses after purchasing a vehicle.
The GST treatment of these expenses depends largely on whether the underlying vehicle itself qualifies for ITC.
Insurance
Section 17(5)(ab) specifically addresses insurance-related services.
ITC on vehicle insurance is generally blocked where the vehicle itself is ineligible for ITC. However, credit may be available where the vehicle qualifies under the permitted exceptions.
Repairs and Maintenance
Expenses such as:
- Servicing
- Repairs
- Replacement parts
- Maintenance contracts
are usually subject to similar restrictions.
If the underlying vehicle qualifies for ITC, related repair and maintenance services may also qualify.
Fuel Costs
GST does not apply to petrol and diesel and hence ITC cannot be claimedas GST is not charged on such products.
ITC on Company-Owned Cars vs Personal Use Cars
Although most taxpayers believe that once they purchase a car in the name of the company, they are entitled to receive GST credit, the eligibility of ITC is based on the purpose of the vehicle purchase and GST legislation and not on the ownership.
| Particulars | Company-Owned Car | Personal Use Car |
| Ownership | Registered in the name of the business entity | Registered in the name of an individual |
| Primary Purpose | Business-related activities | Personal transportation |
| ITC Eligibility | Generally blocked unless used for resale, passenger transport, driver training, or eligible leasing activities | Not eligible for ITC |
| GST Compliance Requirements | Business must satisfy conditions under Section 17(5) of the CGST Act | No ITC can be claimed regardless of GST registration |
| Documentation Required | GST invoice, registration certificate, business-use records, supporting agreements | Not applicable for ITC purposes |
| Common Examples | Taxi fleet vehicles, driving school cars, dealership inventory vehicles | Family car, personal commuting vehicle, recreational vehicle |
| Risk of ITC Reversal | High if claimed incorrectly without satisfying eligibility conditions | Any ITC claim would be disallowed |
Common Mistakes Businesses Make while Claiming ITC on Cars
Businesses can often find themselves in compliance with problems because of the lack of understanding of the ITC of vehicles.
Common mistakes most businesses make while claiming ITC on cars include:
- Assuming that ITC is available due to GST paid: The payment of GST on a vehicle does not necessarily result in ITC eligibility.
- Ignoring Section 17(5): The provisions of blocked credit are disregarded by many businesses.
- Making the claim of ITC based on sole ownership of companies: The GST law does not depend on ownership.
- Overlooking seating capacity rules: There is a very important threshold of 13-person seating that defines eligibility.
- Claiming unsuitable documentation of ITC: Any ITC claim must be accompanied by proper records to substantiate the claim in case of assessments or audits.
Documents Required to Claim ITC on Eligible Vehicles
Where ITC is available, businesses should maintain complete documentation.
GST Tax Invoice
The invoice should contain:
- Supplier GSTIN
- GST amount
- Vehicle details
- Invoice date and number
Vehicle Registration Certificate
The RC should clearly identify vehicle specifications and ownership.
Business Use Documentation
Depending on the nature of the business, supporting records may include:
- Passenger transport permits
- Lease agreements
- Rental contracts
- Training records
- Commercial licenses
GST Return Records
GST returns should appropriately reflect and reconcile the credit.
Conclusion: Can ITC Be Claimed for Purchase of a Car?
It all depends on the use of the vehicle. In the case of most businesses buying passenger cars either as executive, administrative, and employee-related transport, car purchase under ITC is still prohibited in Section 17(5) of the CGST Act. Nevertheless, there are some notable exemptions on the businesses involved in reselling vehicles, passenger carriages, driving schools, and some leasing operations. Moreover, vehicles that have over 13 seating capacity can be considered as ITC provided it meets the relevant conditions.
Since GST provisions are complex and financial implications of such purchases are huge, a business should consider the buying of a vehicle before claiming any credit. Good documentation, proper interpretation of GSTs, and timely compliance are necessary.
To get trusted GST information, compliance advice, and assistance in filing returns, as well as a practical understanding of the complicated GST provisions, the businesses can consider the materials at GSTZen.
FAQs
Can a company claim ITC on a car purchased for employee use?
Generally, no. If the vehicle is used for employee transportation, executive travel, or administrative purposes, ITC is typically blocked under Section 17(5). Specific exceptions may apply where transportation services form part of the taxable business activity.
Is ITC available on electric cars purchased by a business?
ITC may be available if the electric vehicle is used for passenger transportation, resale, leasing, or driver training. Simply purchasing an EV for company use does not automatically make ITC available.
Can a GST-registered individual claim ITC on a personal car?
No. You can’t claim ITC on personal-use vehicle(s) under GST.
Can ITC be claimed on car insurance and maintenance expenses?
Generally, these expenses follow the eligibility status of the underlying vehicle. If ITC on the vehicle is blocked, ITC on related insurance, servicing, and maintenance is usually blocked as well, subject to specified exceptions.
What happens if ITC is wrongly claimed on a motor vehicle?
Incorrectly claimed ITC may be reversed along with applicable interest and penalties under GST law. Businesses should verify eligibility before claiming any credit.