Know When You Can Claim ITC On a New Business Vehicle

If you are considering to purchase of a vehicle for your business, understand when ITC is allowed or blocked to make an informed decision. In this blog, we’ll explore the nuances of ITC eligibility for motor vehicle purchases, focusing on seating capacity and the purpose of purchase.

What is Input Tax (ITC)

Input Tax Credit (ITC) is a system which allows businesses to reduce the amount of tax they pay on their final product by subtracting the tax they’ve already paid on their inputs. This system is designed to avoid double taxation on the same product and to ensure that the tax burden is passed along the supply chain until it reaches the end consumer.

To illustrate, imagine you are a manufacturer. Here’s how ITC works:

• Tax on Output (Final Product): Suppose the tax payable on your final product is Rs 850.
• Tax on Inputs (Purchases): Assume you have already paid Rs 700 in tax on the raw materials and other inputs needed to produce the final product.

With ITC, you can subtract the Rs 700 paid on inputs from the Rs 850 payable on the final product. This means you only need to pay the difference, which is Rs 150.

Understanding ITC Blockage on Motor Vehicles

ITC on motor vehicles is often a point of confusion for business owners. To determine whether you can claim ITC on a motor vehicle, you need to answer two key questions:

1. Seating Capacity: What is the seating capacity of the vehicle?
2. Purpose of Purchase: What is the primary purpose of purchasing the vehicle?

Let’s delve into these questions in detail.

1. Seating Capacity

The seating capacity of the vehicle plays a significant role in determining ITC eligibility. Here’s a breakdown:

• ITC Blocked: For vehicles with a seating capacity of up to 13 persons (including the driver), ITC is generally blocked. This includes popular models such as the Tata Nano, Tata Nexon, and Toyota Fortuner.
  
• ITC Allowed: For vehicles with a seating capacity of more than 13 persons (including the driver), ITC is allowed. This includes buses like the Volvo Bus and commercial transport vehicles like BEST buses.
  

Therefore, if you are considering purchasing a bus with a seating capacity exceeding 13 persons for your business, you can claim ITC on that purchase.

2. Purpose of Purchase

The purpose for which the vehicle is purchased also determines ITC eligibility. Let’s examine the scenarios where ITC is allowed or blocked based on the purpose of purchase:

• ITC Allowed: If the vehicle is purchased for any of the following purposes, ITC is allowed:
  1. Further Supply of Such Vehicle: If your business involves supplying vehicles, you can claim ITC. For example, a car dealership purchasing cars for resale can claim ITC.
     
  2. Transportation of Passengers: If the vehicle is used for transporting passengers, such as a bus for inter-city transport, ITC is allowed.
     
  3. Imparting Training on Driving: If the vehicle is used for driving instruction, like a driving school purchasing cars for training, ITC is allowed.
     
• ITC Blocked: If the vehicle is purchased for any other purposes, whether personal or business-related, ITC is blocked. For instance, if ABC & Co. buys a car for their executives to use for business travel, ITC will be blocked.
  

Maintenance and Insurance Costs

In addition to the purchase of the vehicle, ITC on related expenses such as general insurance, servicing, repairs, and maintenance also follows the same rules:

• ITC Allowed: If ITC is allowed on the purchase of the vehicle, it extends to the associated costs of insurance, servicing, repairs, and maintenance.
  
• ITC Blocked: Conversely, if ITC is blocked on the vehicle purchase, it is also blocked on these related expenses. Exceptions include manufacturers and insurers of such vehicles, who can claim ITC on these expenses.
  

Practical Examples

• Blocked ITC Example: ABC & Co. purchases a Tata Nexon for business travel. Despite being for business purposes, ITC is blocked due to the seating capacity being under 13 persons.
  
• Allowed ITC Example: A transport company purchases a Volvo Bus for inter-city passenger transport. Here, ITC is allowed because the seating capacity exceeds 13 persons and the vehicle is used for passenger transportation.
  

Conclusion

Understanding ITC rules for motor vehicle purchases is crucial for making informed business decisions. By considering the seating capacity and the purpose of purchase, you can determine whether ITC is allowed or blocked. For business owners looking to invest in vehicles, ensuring compliance with ITC regulations can lead to significant tax savings. Always consult with Laabdhi, tax consultant Mumbai to navigate the complexities of ITC and make the most of your business investments.