GST on captive use of motor vehicle – Ambiguous for auto industry

Indian automotive sector is one of the core sectors embodying the spirit of Atmanirbhar Bharat. It is a significant driver of macroeconomic growth and technological development contributing around 15 percent of overall Goods and Services Tax (GST) collection. The sector has been experiencing hardships for over a long period, on account of liquidity crisis, economic slowdown, rising input cost, COVID outbreak, etc. This article attempts to dissect the issues revolving around captive usage of motor vehicles by the auto companies and examine GST implications or ambivalence on such transactions.

Captive use of motor vehicles

Auto companies often use motor vehicles (manufactured in respective company’s factory) for its own / captive use in the factory or in the course or furtherance of business. Before deep diving into GST implications on such own usage, it is important to correlate requirement under Motor Vehicle Act, 1988 for registration of motor vehicles.

Companies are required to ensure compliance with registration at Regional Transport Office (RTO). An application for registration of vehicle is to be made in accordance with the provisions of law, accompanied with different set of documents, inter-alia, sales certificate in Form 21, insurance certificate, address details etc. Sales certificate in Form 21 specifies details of buyer, specifications regarding motor vehicle and its maker.  

The issue which encapsulates under GST is whether GST liability would arise at the time of registering motor vehicle with RTO. As an industry practice, most of the major auto players are raising GST self-invoice under the category of B2C for use of motor vehicle for own usage, which is subsequently shared with RTO for registration. Such self-invoice is duly reported in the monthly returns and appropriate tax liability is discharged through GSTR-3B return. Further, such taxes paid are capitalised in the books of accounts added in the cost of the motor vehicle. Such treatment is followed owing to the same position adopted in the erstwhile regime which we have discussed in ensuing paragraph.

1. Treatment under excise regime
   It is pertinent to note that under the erstwhile excise regime, excise duty was levied at the time of manufacture of goods. However, it was paid at the time of removal or clearance from the place of manufacture, even if such removal does not amount to sale. Accordingly, under the erstwhile regime, excise invoice was raised at the time of RTO registration for captive usage / consumption. 
2. Uncertainty under the GST regime - challenges
   The ambiguity under GST regime on captive consumption of motor vehicle has been analysed from different transaction perspective.
   • Manufacturing and registration of motor vehicle: Taxability
     • Under the GST regime, tax is levied on supply of goods or services made or agreed to be made for a consideration. While registering the motor vehicle with RTO, there is no supply per se as it is transaction to self. Therefore, ambiguity arises whether GST should be paid on such transaction i.e., registering motor vehicle with RTO.
     • It may be noted that under Motor Vehicle Act read with Central Motor Vehicles Rules, 1989, there is a requirement for furnishing sales certificate i.e. Form 21. It mainly captures details pertaining to motor vehicle like model, engine number, capacity etc. along with buyer details.
     • Form 21 nowhere requires details of GST tax invoice and accordingly, one may take the view that self-supply is not liable to GST, thereby no tax implications should arise.
   • Eligibility of Input Tax Credit (ITC)
     • As far as ITC on manufacture of such captively consumed motor vehicle is concerned, the ITC would be available as same will be utilised in further supply of said vehicle after usage for some period.
     • Further, reliance may be placed on ruling given by Karnataka Authority for Advance Ruling in case of Shri Keshav Cement & Infra Limited [2019(10)TMI 570] wherein it was ruled that applicant shall be entitled to eligible input tax credit on inputs used on electricity generated for captive consumption, provided that the entire production is captively consumed in manufacture of final taxable output. Accordingly, it may be construed that ITC can be availed as long as motor vehicle is used for business purposes.
     • However, subsequent to amendment in GST law, new clause was introduced adding new condition to avail ITC wherein taxpayer can avail ITC only when details of invoice has been furnished by supplier in his outward supplied and same is appearing in GSTR-2A /2B of the recipient.
     • In this case, since auto companies usually issue B2C self-invoice, the aforementioned criterias are not met restricting the availment of input tax credit.
   • Subsequent sale of used cars
     Moving ahead, another important area which needs to be examined is the GST treatment of sale of such used cars, as generally auto companies sell such used motor vehicles after few years.
     
     There are two alternatives prescribed under GST regime:
     • Where the taxpayer has not availed ITC on input goods or services, GST liability would arise on the marginal value i.e. sale value minus purchase value / WDV.
     • However, where ITC has been availed, taxpayer is liable to discharge GST on the transaction value at the time of final sale on the applicable rate.

Most of the auto companies are availing ITC on all inward supplies and discharging GST on marginal basis at the time of sale of such used vehicles. Such treatment of disposing tax on marginal basis may be challenged by the authorities demanding tax on the entire transaction value, as tax paid at the time of registration cannot be construed as reversal/ non-availment of ITC.

Conclusion

To conclude, auto companies’ sales have been hit hard due to COVID-19, rising input cost etc. which slammed the brakes of the sector which was beginning to fast-track. Current practice of discharging GST liability by most of the major auto players becomes an additional cost to these companies, thereby affecting the working capital requirements. One may take the view raising commercial tax invoice for the purpose of RTO registration and subsequently, tax may be discharged on transaction value on sale of such used vehicle. However, an alternate view is possible that practice adopted in erstwhile regime would be followed and by discharging GST liability, the company is squaring off ITC availed in respect of such supplies.

Considering the stake involved, a clarification from GST council on this issue would certainly be helpful in preventing unwarranted litigation and will aim to boost the sector.