The Government, under various notifications, has brought renting of motor vehicles under Reverse Charge Mechanism (RCM). Additionally, Section 17(5) of the CGST Act outlines restrictions on Input Tax Credit (ITC) for motor vehicles used for transportation. This article explores the implications of RCM and ITC provisions concerning the renting of motor vehicles.
Background:
Under section 9(3) of the CGST Act, 2017, the Government may, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both.
The Government has notified categories of goods or services or both under notification no. 13/2017-CT (R) dated 28-06-2017. The said notification has been amended to specify more categories of goods or services through various notifications.
As per the Notification no. 22/2019-CT (R) dated 30-9-2019, services relating to Renting of Motor Vehicle has been brought under Reverse Charge Mechanism with the following entry:
- Service – Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate.
- Service Provider – Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6 per cent. to the service recipient.
- Service Recipient –Any body corporate located in the taxable territory.
Now, we will discuss about the ITC related provisions w.r.t. renting of motor vehicles:
As per the extract of Section 17(5) of CGST Act, 2017:
“Input tax credit shall not be available in respect of the following, namely:-
(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver),….”
The above entry means that if a Company has taken renting of motor vehicle services from an agency (other than a Company) registered or un-registered under GST, the ITC of such GST shall not be eligible and shall become cost to the Company.
Now, lets take examples to clarify the doubts:
Q.1 XYZ Pvt. Ltd. has availed renting of motor vehicle services from Bata Travels, Partnership firm registered under GST. The firm has charged GST at the rate of 12% on XYZ Pvt. Ltd. Whether the recipient is liable to pay taxes under RCM?
Ans.- No. Since, the service provider is charging GST at the rate of 12% i.e. 6% CGST and SGST, each.
Q.2 Same as above. But the service provider is charging GST at 2.5%. Whether GST is payable under RCM?
Ans.- Yes. The recipient company shall be liable for payment of GST under RCM. The supplier is non-body corporate and GST not charged at 12%.
Q.3 XYZ Pvt. Ltd. has availed renting of motor vehicle services from Krishna travels, proprietorship un-registered under GST. Whether GST is payable under RCM and at what rate?
Ans.- Yes. The GST is payable under RCM at the rate of 5%.
Conclusion: The inclusion of renting of motor vehicles under Reverse Charge Mechanism has tax implications for both service providers and recipients, depending on their GST registration status and invoicing practices. Additionally, restrictions on Input Tax Credit for motor vehicles further impact the tax liabilities of businesses availing such services. Understanding these provisions is essential for businesses to navigate GST compliance effectively.
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Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. The observations of the authors are personal view and this cannot be quoted before any authority without the written permission of the authors. This article is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this article will be accepted by authors. It is recommended that professional advice be sought based on the specific facts and circumstances. This article does not substitute the need to refer to the original pronouncements on GST.
(For any feedback or query, the author can be reached at rapg@rapg.in, 9818449179)
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