Many small business owners and companies buy a car in the name of the business. The invoice shows a large GST amount, and the accountant sees it auto-populated in GSTR-2B. It is tempting to claim this input tax credit (ITC) to reduce your monthly tax payout. However, the GST law is very strict about motor vehicles.
What the GST law says about cars
Under Section 17(5)(a) of the CGST Act, ITC is not available on motor vehicles for the transportation of persons with an approved seating capacity of not more than 13 persons (including the driver). This is part of the blocked credit list under Section 17(5). Because a normal 5-seater or 7-seater company car falls in this category, the GST paid on it is a cost to the company and cannot be claimed as ITC.
Do not claim this in Table 4(A)(5): Blocked credit claimed and used has to be paid back with interest at 18% a year under Section 50(3). If your GSTR-2B shows the car's GST as available, it flows into Table 4(A)(5) of GSTR-3B; reverse it in Table 4(B)(1), the row for Section 17(5) credit (CBIC Circular 170/02/2022-GST).
The same rule applies whatever the form of the business. A proprietorship, partnership firm or LLP that buys a car is in the same position as a company: Section 17(5)(a) looks at the vehicle and its use, not at who owns it.
The three exceptions where ITC is allowed
You can claim GST input on a car purchase only if you use the vehicle for making specific taxable supplies. The exceptions are:
- Further supply of such motor vehicles: Car dealers who buy cars to sell them.
- Transportation of passengers: Taxi operators or cab services.
- Imparting training on driving: Registered motor driving schools.
If your business does not fall into one of these three categories, the ITC is permanently blocked.
The GST rate on cars since 22 September 2025
The 56th GST Council meeting reset car rates from 22 September 2025, and the compensation cess on cars went away (GST Council FAQ, PIB clarification):
- Small cars: 18%. That means petrol, LPG or CNG cars up to 1,200 cc and 4,000 mm long, and diesel cars up to 1,500 cc and 4,000 mm long.
- Mid-size and large cars, including SUVs above those limits: 40%, with no cess.
The lower rate cuts the cost of a company car, but it does not change the ITC answer. Whether the invoice shows 18% or 40%, the credit stays blocked unless one of the three exceptions below applies. An invoice dated before 22 September 2025 will still show 28% plus cess.
What about repairs, insurance and servicing?
According to Section 17(5)(ab) of the CGST Act, ITC on general insurance, servicing, repair and maintenance for these cars is also blocked. If the ITC on the car itself is blocked, the GST paid on its maintenance or insurance is also blocked. You can only claim ITC on repairs if you are in the business of selling cars, transporting passengers, or running a driving school.
Worked example
Let us say a software company buys two 5-seater cars in October 2026: a compact petrol car (under 1,200 cc and 4,000 mm) for its sales manager and an SUV for its director.
| Invoice | In books | In GSTR-2B | Result |
|---|---|---|---|
| Compact car (18%) | ₹8,00,000 + ₹1,44,000 GST | ₹1,44,000 | ITC blocked |
| SUV (40%) | ₹15,00,000 + ₹6,00,000 GST | ₹6,00,000 | ITC blocked |
| Annual car insurance | ₹30,000 + ₹5,400 GST | ₹5,400 | ITC blocked |
| Laptops for office | ₹1,00,000 + ₹18,000 GST | ₹18,000 | Eligible ITC |
The accountant must record the car purchase and insurance GST as an expense or capitalize it with the car cost. They must not claim it as eligible input tax credit.
Frequently asked questions
Can a company claim ITC on a 14-seater staff bus?
Yes. The restriction in Section 17(5)(a) applies only to motor vehicles with a seating capacity of 13 or fewer persons. If a company buys a 14-seater bus to transport employees, it can claim the ITC because the seating capacity exceeds 13.
Can we claim ITC on commercial goods vehicles?
Yes. The block in Section 17(5)(a) is for motor vehicles meant for the transportation of persons. If you buy a truck or a delivery van to transport goods in the course of your business, the ITC is allowed.
Check your own GSTR-2B
Our tool helps you sort your GSTR-2B data so you can easily spot and separate ineligible car purchase invoices from your eligible ITC. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 21 October 2026. Sources: CGST Act Section 17, GST Council FAQ on the 56th meeting decisions, PIB note on revised vehicle rates.