Input Tax Credit on Purchase of Car for Rent-a-Cab Service – Marred by Conflicting Advance Rulings

Rent-a-cab (RAC) operators typically either purchase or take cabs on rent for providing the outward taxable supply of RAC service. Input Tax Credit (ITC) is eligible to operators who take cabs on rent for providing the outward taxable supply of RAC service expressly under Section 17 of the Central Goods and Services Tax (CGST) Act, 2017. However, the operators who purchase motor vehicle (viz., cab) and provide outward taxable supply of RAC service is caught in a quandary since there are differing opinions / advance rulings. This article delves on this aspect, since the availability of ITC for such operators (who purchase cabs) is vital in pricing the outward RAC service.

Before proceeding, it is important to note that the term “rent-a-cab” was referred but not defined under the GST law during the aforesaid period. However, under Section 65(91) of the Finance Act, 1994 (vi.z., the erstwhile service tax law), which was made inapplicable from July 01, 2012, the term “rent-a-cab scheme operator" was defined as ‘any person engaged in the business of renting of cabs’. Hence, it can be deduced that rent-a-cab is synonymous with renting of cabs.

Let us also understand the term “cab”. This, too, is not defined under the GST law. However, Section 65(20) of the Finance Act, 1994 defined "cab” as:

• a motor cab (viz., motor vehicle constructed or adapted to carry up to 6 passengers, excluding the driver, for hire or reward); or
• a maxi cab (viz., motor vehicle constructed or adapted to carry between 7 – 12 passengers, excluding the driver, for hire or reward); or
• any motor vehicle constructed or adapted to carry more than 12 passengers, excluding the driver, for hire or reward.

While the above definition is not binding under the GST law, we understand that it covered passenger-carrying motor vehicles of varying capacities.

At this juncture, it is important to understand the spirit of Section 17(5) of the CGST Act, which lists blocked credits. Clauses (a) and (b) therein (up to January 31, 2019) and clauses (a), (aa) and (b) therein (from February 01, 2019) primarily cover items of personal consumption. Also, the amendments brought into GST law since February 01, 2019 singles out motor vehicles for transportation of passengers with approved seating capacity of up to 13 persons (including the driver) under the blocked credit category.

Thankfully, for the assessees, the term “rent-a-cab” was removed from the CGST Act with effect from February 01, 2019. Nevertheless, from the foregoing, it can be deduced that the term “cab” in “rent-a-cab” under the GST law plausibly covered motor vehicles constructed or adapted to carry up to 12 passengers (excluding the driver).

Section 17(5) ibid provides that ITC is not permissible on motor vehicles (for transportation of persons) except when they are used for making the following taxable supplies:

• further supply of such vehicles; or
• transportation of passengers; or
• imparting training on driving such vehicles;

In re: Narsingh Transport, the Authority for Advance Rulings (AAR), Madhya Pradesh [vide Order dated February 18, 2019] ruled to the effect that:

• “renting of motor vehicle” could be construed towards “further (taxable) supply” referred above in the list of exceptions, since the term “supply” is of wide import; and
• therefore, ITC could be claimed on purchase of motor car for providing RAC output service.

On the other hand, in re: Mohana Ghosh, it was sought before the AAR (West Bengal) whether ITC can be availed on purchase of motor cars since they are used for taxable transportation of passengers. Here, the AAR (vide its suo motu rectified Order dated June 25, 2019) neatly distinguished “renting of motor vehicle” and “transportation of passengers”. That, in case of “renting of motor vehicle”, the customer pays for the duration of the rent period irrespective of the distance travelled or idle time. On the other hand, for passenger transportation service, the customer is charged for the distance travelled, which is usually over a pre-determined route. Hence, the AAR denied ITC on purchase of motor cars, concluding that:

• the output service is not “transport of passengers” but “renting of motor vehicle”; and
• the latter is not covered under the list of exceptions mentioned above.