GST on Renting of Motor Vehicles with Operators: Driving Through Tax Maze!

Renting a motor vehicle sounds simple—pick a car, pay the rent, and hit the road. But when it comes to GST (Goods and Services Tax), the journey takes a few unexpected detours! Whether you’re a business renting out fleets, an individual leasing a car, or just someone wondering why the final bill looks suspiciously high, GST plays a crucial role. From 5% to 12%, input tax credit dilemmas, and exemptions that feel like speed bumps, navigating GST on vehicle rentals can be as tricky as driving through rush-hour traffic! So, buckle up as we explore the tax implications, breaking down complex rules into smooth, readable lanes.

Contents:

Through this article, the author wishes to discuss the following important aspects about the taxability of the renting of a motor vehicle with an operator under GST;

1.Analysis of the term renting of motor vehicles

2. Illustrative Scenario: Quick Wheels Pvt Ltd and Tech Solutions

3. Distinction between renting of motor vehicles and passenger transportation services

4. Taxability of the transaction [Renting of Cabs/motor vehicles]

5. Applicability of RCM

6. Analysis of the term “Body Corporate”

7. Conclusion on Taxability of Renting Services

8. Taxability of Inward supply of renting of motor vehicle services

9. ITC eligibility:

10. To service provider [Quick Wheels Pvt Ltd]

11. To service recipient [Tech Solutions]

12. Safeguards to service providers under both the GST rates (i.e., 5% and 12%) simultaneously

13. Conclusion

Analysis of the term renting of Motor Vehicle:

What is a Motor vehicle?

The definition of the “motor vehicle” under the GST law refers to the definition given in the Motor Vehicles Act. According of section 2(28) of the Motor Vehicles Act, 1988, “motor vehicle” or “vehicle” means:

“any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding twenty-five cubic centimetres.”

However, only those vehicles that are designed to carry passengers would be relevant to our discussion in this article.

There are various terms in the general parlance which are used for vehicles that carry passengers. Let us understand the meaning of those terms.

1.“Motor cab” means any motor vehicle constructed or adapted to carry not more than 6 passengers, excluding the driver, for hire or reward [section 2(25) of the Motor Vehicles Act, 1988].

2. “Motorcycle” means a two-wheeled motor vehicle, including any detachable sidecar having an extra wheel, attached to the motor vehicle [section 2(27) of Motor Vehicles Act, 1988].

3. Maxi cab means any motor vehicle constructed or adapted to carry more than six passengers, but not more than twelve passengers, excluding the driver, for hire or reward [section 2(27) of the Motor Vehicles Act, 1988].

All the above vehicles are vehicles which are designed to carry passengers, and apart from the above vehicles, the buses also get covered under the motor vehicle definition.

What is Renting?

In common parlance, renting is defined as an agreement where a payment is made for the temporary use of a good, service, or property owned by another. In the earlier tax regime, there was confusion as to whether hiring of goods is considered as renting and taxable under service tax. Service tax was applicable on the entry ‘service provided or agreed to be provided to any person, by a rent-a-cab scheme operator in relation to the renting of a cab,’ where rent-a-cab scheme operator meant a person who is the holder of a license under the Rent-a-Cab Scheme, 1989. Under the scheme, it would be the duty of the person availing the service to keep the license holder informed of the movement of each vehicle from time to time.

Such a scheme clearly brought out the distinction between hire and rent. In the case of ‘hiring’ undoubtedly, the owner of the vehicle retains control and possession; he either drives the vehicle himself or employs somebody else to drive the vehicle, and the customer merely makes use of the vehicle by travelling in it, on the basis of a contract and he will pay the requisite hire charges for the period he uses the vehicle. Unlike the same, in the case of rent-a-cab, as is provided in the Motor Vehicles Act, the person is enabled to take the vehicle with him wherever he pleases, subject to the terms of the contract between the parties and he uses the vehicle as his own subject to paying the rent. This was held in Commissioner of Customs & Central Excise v. Sachin Malhotra.

A contrary view has also been taken in the case of Anil Kumar Agnihotri v. Commissioner of Central Excise, Kanpur where it was held that the two terms have not been specifically defined under the Act and, as such, they have to be assigned the meaning which is acceptable in common parlance. Ordinarily, in common usage, there is hardly any distinction between ‘renting’ or ‘hiring,’ and both terms are usually used as synonyms.

Illustrative Scenario: Quick Wheels Pvt Ltd and Tech Solutions.

Imagine “Quick Wheels,” a car rental company (private limited company) in Bengaluru, has entered into a contract with “Tech Solutions Pvt Ltd,” a large IT firm with multiple offices across the city. As part of this agreement, Quick Wheels provides a fleet of sedans and SUVs along with drivers exclusively for Tech Solutions. These vehicles are used to transport Tech Solutions’ employees between their various office locations, and sometimes for client meetings within the city.

Before analyzing the GST implications, particularly the rate at which Quick Wheels should charge GST to Tech Solutions- it is essential to first identify the true nature of the service being supplied i.e., whether Quick Wheels is offering a “renting of motor vehicle with operator” service or a “passenger transportation” service to Tech Solutions. Though they may appear similar, these services are classified under different SAC codes. Hence, proper classification is the starting point for determining the correct GST treatment in such arrangements.

Distinction between renting of motor vehicle and passenger transportation services:

Renting of Motor Vehicle with Operator for transport of passengers falls under the Heading 9966. As per the explanatory notes to the Heading 9966. The renter defines how and when the vehicles will be operated, determining schedules, routes, and other operational considerations.

Circular No. 177/09/2022-TRU also clarified that where the body corporate rents the motor vehicle for a period of time, during which the motor vehicle shall be at the disposal of the service recipient (i.e., to use in the manner as it likes subject to agreement with the person providing vehicle on rent), the service would fall under 9966.

Passenger Transport Services, on the other hand, fall under the Heading 9964. As per the explanatory notes, services under this heading shall be provided on a pre-determined route and timetable.

Heading 9964 covers passenger transport services. The scheme of classification of heading 9964 includes the following:

1.Local transport and sightseeing transportation services of passengers;

2. Long-distance transport services of passengers;

The preface to the explanatory notes to the scheme of classification of services at para 3 is as under:

1.The explanatory notes indicate the scope and coverage of the heading, groups and service codes of the Scheme of Classification of Services.

2. These may be used by the assessee and the tax administration as a guiding tool for the classification of services.

3. However, it may be noted that where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.

From the above it is clear that if a particular service is classifiable under more than one category then the category of service which specifically covers such service would be preferred than the general service.

In the instant case, let’s say that once the vehicles are provided to the Tech Solutions upon booking, vehicles will be at the disposal of Tech Solutions I.e., Tech Solutions will determine how, when, and where to travel, thereby classifying the service provided as car rental provided by Quick Wheels to its customer (Tech Solutions).

Taxability of the transaction [Renting of Cabs/vehicles]:

Taxability of Renting of Motor vehicle with effect from 01.07.2017 to 30.09.2019, SL No.10(i) (SAC: 9966) of Notification No. 11/2017-CT) as amended from time to time, services of Renting of Motor Vehicles, provided by any supplier where the cost of fuel was included in the consideration, were taxable under the Forward Charge Mechanism (FCM) at the following GST rates:

1. Option 1– 5% GST (2.5% CGST + 2.5% SGST or 5% IGST)

Input Tax Credit (ITC) was restricted, except for ITC on input services used in the same line of business.

2. Option 2– 12% GST

Full ITC allowed with no restrictions.

Note: It is important to note that heading 9966 covered “Rental services of transport vehicles with or without operators” till 30.09.2019. However, CBIC vide Notification No. 20/2019- CT(R), omitted the word “or without” w.e.f. 01.10.2019. Thereby, w.e.f. 01.10.2019, Rental services of transport vehicles with operators are only covered under SAC 9966.

Taxability of Renting of Motor vehicle w.e.f. 1st October, 2019:

The Central government issued Notification No. 22/2019-CT (R) dated 30th September, 2019 thereby inserting Entry Number 15 w.e.f. 01.10.2019, in the RCM principal notification (Notification No. 13/2017-CT (R) dated 28.06.2017). The extract of the said entry, as amended from time to time, is reproduced below:

SL No. 15 of Notification No. 13/2017-CT(R), Services provided by other than body corporate (who does not issue an invoice charging GST at 12%) 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, would be taxable under RCM.

Thereby, it is very clear that w.e.f. 01.10.2019, if the supplier (other than Body corporate) had opted for option 1, i.e., 5% GST rate, and supplying services to body corporate; body corporate would be liable to pay GST @ 5% under RCM.

Furthermore, Circular No. 130/49/2019 dated 31st December 2019 was issued to clarify that when any service is placed under RCM, the supplier shall not charge any tax from the service recipient, as this is the settled procedure in law under RCM. As there are only 2 rates applicable for service of renting of motor vehicles which is 5% with limited ITC and 12% with full ITC, the said notification would be interpreted as below:

1.Where the supplier of service has issued an invoice charging GST @12% from the recipient, the same would be liable for forward charge.

2. Where the supplier of service does not charge GST at 12% from the recipient or has issued an invoice charging GST @5% from the recipient of service, the same shall be liable for RCM only in the case where such supplies has been made by the Vendor who is other than a body corporate to a body corporate.

The summary of taxability of renting of motor vehicle (w.e.f.  1.10.2019) with operator under FCM and RCM is as follows:

As discussed above, the service of renting a motor vehicle by Quick Wheels to Tech Solutions would be taxable at 5% with limited ITC or 12% with full ITC. However, it is also important to determine whether RCM is applicable or not in the present case.

Applicability of RCM in the present case:

RCM entry No. 15 of Notification No. 13/2017-CT(R) covers services provided by other than body corporate to a body corporate i.e.,

Service provider: Other than body corporate

Service recipient: Body Corporate

Let us now examine whether the conditions relating to the service provider (Quick Wheels) and service recipient (Tech Solutions) are being satisfied in the present case.

Analysis of the term “Body corporate”:

The term ‘Body corporate’ is not defined under the GST law. However, Notification No. 13/2017-CT(R) refers to section 2(11) of the Companies Act, 2013 to derive the meaning of body corporate. As per the said section, the body corporate means:

“Body corporate” or “corporation” includes a company incorporated outside India, but does not include—

1.a co-operative society registered under any law relating to co-operative societies; and

2. any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;

Any company incorporated in India or outside India is covered under the ambit of body corporate. However, according to the entry only those body corporates which are located in taxable territory are covered under the ambit of recipient.

In the present scenario, since both Quick Wheels and Tech Solutions are private limited companies, they qualify as body corporates.

Conclusion on the taxability of rental services provided by Quick Wheels:

Accordingly, in the present case, since Quick Wheels is a private limited company and qualifies as a body corporate, the services provided by it do not fall under Entry No. 15 of Notification No. 13/2017-CT(R) Therefore, the renting of motor vehicles by Quick Wheels (on or after 01.10.2019) to Tech Solutions would be liable to GST under the forward charge mechanism (FCM) at the rate of either 5% with limited input tax credit or 12% with full input tax credit at the option of service provider (Quick Wheels).

“Taxability of Inward Supply (Car Rental Services Procured by Quick Wheels):

In the present case, Quick Wheels, for the purpose of rendering car rental services to its clients, procures similar car rental services from third-party vendors. In such case, the taxability would be as follows:

1.Vendors (service providers) are body corporates: The transaction is taxable under the Forward Charge Mechanism (FCM). Accordingly, the vendor is required to charge GST on the invoice and discharge the tax liability to the government.

2. Vendors (service providers) are not body corporates: in this case, services provided by vendors would be covered under the RCM entry no 15 of NN.13/2017-CT(R). Therefore, when the vendor issues an invoice charging GST at 5% or when the vendor does not issue an invoice charging GST at 12%, Quick Wheels is liable to pay the GST under RCM for the rental services procured from the vendors, as Quick Wheels is a body corporate.

ITC eligibility to Quick Wheels [on expenses such as purchase of cars, fuel, vehicle maintenance, insurance, and other operational costs]:

For availing the Input Tax Credit of the GST paid on the inputs/input services, Quick Wheels should satisfy all the following conditions:

1.Condition 1: The procurements should be used in the course or furtherance of business.

2. Condition 2: The 6 conditions for availing ITC as per Section 16(2) of CGST Act should have been satisfied.

3. Condition 3: Depreciation should not be claimed on the tax component.

4. Condition 4: Procurements should be used for making outward taxable supplies.

5. Condition 5: ITC should not be blocked under Sec 17(5) of the CGST Act 2017.

In terms of Section 17(5)(a), ITC attributable to motor vehicle purchased for the transportation of person having seating capacity of 13 persons, is blocked except when they are used for making the following taxable supplies:

1.Further supply of such motor vehicle; or

2. Transportation of passengers; or

3. Imparting training on driving such motor vehicles.

Further, as per Section 17(5) (ab), ITC attributable to services of general insurance, servicing, repair and maintenance of the aforesaid motor vehicle is also blocked. However, ITC is not blocked if such a motor vehicle is used to make any of the three taxable supplies mentioned in the above para.

In the instant case, ITC of the GST paid on the cars (i.e., motor vehicles) purchased by Quick Wheels is not blocked as the same is being used for further supply (i.e., rentals) of such motor vehicles. Also, ITC related to insurance, servicing, repairs and maintenance of the said motor vehicle is also not blocked.

At this juncture, one may argue that the renting of motor vehicle is not covered under the exception list of “further supply of such motor vehicle” and hence ITC should be blocked under Section 17(5). However, in author’s view, the said interpretation is incorrect for the following reasons:

1.The wording used in the exception is “further supply of such motor vehicle”. What is the meaning of the word ‘supply’? The word ‘supply’ as defined under Section 7 of the CGST Act, 2017 would include sale, lease, rental etc.Since supply includes rental, renting of motor vehicle would include within the ambit of “further supply of such motor vehicle”. This implies that the phrase “further supply of such motor vehicle” is not limited to the sale of the motor vehicle alone, but also includes other forms such as leasing or renting.

2. Thus the exception is made not only for sale of motor vehicles but for lease, rent etc.,

3. This interpretation is supported by the ruling of the Telangana Authority for Advance Ruling (AAR)[2023 (76) G.S.T.L. 497] in the case of Sai Service Pvt. Ltd.

Based on the above discussion, there is no blockage of ITC attributable to the purchase of motor vehicles, as well as expenses such as fuel, vehicle maintenance, insurance, and other operational costs.

However, entry no.10 (SAC: 9966) of Notification No. 11/2017-CT (R) as amended from time to time, comes with a condition that if the option of 5% GST on renting of motor vehicle is opted, then entire ITC of input tax charged on goods and services used in supplying the rental service, other than the input tax credit of input service in the same line of business, is restricted. The relevant extract of the provisos of the aforesaid entry is given below.

Provided that credit of input tax charged on goods and services used in supplying the service, other than the input tax credit of input service in the same line of business (i.e. service procured from another service provider of transporting passengers in a motor vehicle or renting of a motor vehicle) has not been taken.

Provided further that where the supplier of input service in the same line of business charges central tax at a rate higher than 2.5%, credit of input tax charged on the input service in the same line of business in excess of the tax paid or payable at the rate of 2.5%, shall not be taken.

Illustration: ‘A’ engages ‘B’ for transport from New Delhi to Jaipur in a motor cab for Rs. 1000. ‘B’, for supplying the said service, hires a motor cab with operator from ‘C’ for Rs. 800. ‘C’ charges ‘B’ central tax at the rate of 6% (Rs. 48). If ‘B’ charges ‘A’ central tax at the rate of 2.5%, he shall be entitled to take input tax credit on the input service in same line the of business supplied by ‘C’ only to the extent of Rs. 20 (2.5% of Rs. 800) and not Rs. 48.

The term “same line of business” is explicitly defined in the first proviso to Serial No. 10 of Notification No. 11/2017-CT (R) and further clarified in Circular No. 206/18/2023- GST dated 31.10.2023, as follows:

The term same line of business means “service procured from another service provider of transporting passengers in a motor vehicle or renting of a motor vehicle”.

Thereby, if ITC is attributable to: [If 5% option is chosen by Quick Wheels]

• Purchase of a Motor vehicle: ITC is restricted.
• Other expense (such as insurance, maintenance, etc): ITC is restricted.
• Same line of business: ITC is eligible. [ITC attributable to motor vehicle rental services or passenger transportation services procured from vendors by Quick Wheels].

Note: However, if the 12% option is chosen by Quick Wheels, no ITC restriction or blockage.

Relevant Rulings:

1.AndhraPradesh Authority for Advance Ruling in case of Andhra Pradesh State Road Transport Corporation [2020 (39) G.S.T.L. 192 (A.A.R. – GST – A.P.)] held that:

The applicant, operating under the name M/s. Andhra Pradesh State Road Transport Services, is engaged in providing rental services of non-air-conditioned buses for various purposes such as marriages, functions, employee and student transport, religious trips (e.g., Sabarimala), political meetings, and project site visits (e.g., Polavaram project). These services qualify as “Renting of Motor Vehicles” under Serial No. 10 of Notification No. 11/2017-Central Tax (Rate) dated 28-06-2017. Accordingly, where the cost of fuel is included in the consideration, the applicable GST rate is 5% or 12%, subject to conditions prescribed under the said notification and its subsequent amendments.

2. HimachalPradesh Authority for Advance Ruling in case of Prasar Bharti Broadcasting Corporation of India [2020 (38) G.S.T.L. 370 (A.A.R. – GST – H.P.)] held that the applicable rate of tax on renting of Cabs as per Notification No. 20/2017, dated 22-8-2017 is 5% with limited ITC (of input services in the same line of business) and 12% with full ITC.

3. Rajasthan Authority for Advance Ruling in the case of Pawanputra Travels [2019 (21) G.S.T.L. 328 (A.A.R. – GST)]held as follows:

• The Service provided by the applicant is not exempted under Notification No. 12/2017, dated 28-6-2017 as this Service does not fall under ‘non-airconditioned contract carriage’ category. The service provided is ‘rent a cab’ Service, which attracts IGST @ 5% (CGST @ 2.5% and SGST @ 2.5%) provided that credit of input tax charged on goods and services used in supplying the service, other than the input tax credit of input service in the same line of business(i.e. service procured from another service provider of transporting passengers in a motor vehicle or renting of a motor vehicle) has not been taken Or IGST @ 12% (CGST @ 6% and SGST @ 6%) if input tax credit is availed.

Further in author’s view, the advance ruling which is issued by the Joint commissioner is applicable only to the assessee who has applied for and got the ruling. It has limited persuasive value for other assesses. It needs to be considered if it is in line with the GST law which the above rulings seem to be.

Based on the above rulings, it can be concluded that the service provider of motor vehicle rental services charging GST at 5% on outward supplies can claim ITC of input service in the same line of business i.e. service procured from another service provider of transporting passengers in a motor vehicle or renting of a motor vehicle.

ITC eligibility to Tech Solutions (service recipient):

As per Section 17(5)(b)(i) of the CGST Act, input tax credit (ITC) is not available in respect of rent-a-cab services, or the leasing, renting, or hiring of motor vehicles used for the transportation of persons having an approved seating capacity of not more than thirteen persons (including the driver).

However, there are two specific exceptions [as proviso’s to section 17(5)(b)] where ITC is allowed even if the seating capacity is less than or equal to thirteen persons:

1.Use for Making Outward Taxable Supplies:

If the inward supply of such services is used by a registered person for making outward taxable supply of the same category of goods or services or both, or as an element of a taxable composite or mixed supply, ITC is admissible.

In the present case, Input Tax of GST paid on renting of motor vehicle services provided by Quick wheels would be block to Tech Solutions as they are not making further supply of same category of services or as an element of a taxable composite or mixed supply.

2. Statutory Obligation on Employer:

When it is mandatory under any law for the employer to provide transportation services to its employees, ITC to that extent can be claimed.

Example: If an employer is required under legal provisions to provide rent-a-cab facilities to female employees working night shifts or employees leaving office late at night, ITC to that extent would be admissible in such cases.

If Quick Wheels chooses to operate under both the GST rates simultaneously using the same GST registration, then the following safeguards shall be put in place, to avoid any frivolous disputes from the GST Department;

1.ITC bifurcation shall be done accurately, by segregating the procurements to the extent of cabs, whose rentals are at 5% (treated as exempted supplies for ITC purposes) and the other at 12% (treated as taxable supplies for ITC purposes);

2. Mapping exercise: Cabs shall be earmarked, which one’s rentals are offered for 5% GST (treated as exempted supplies for ITC purposes) and the other at 12% GST (treated as taxable supplies for ITC purposes).

3. Record Keeping: Invoicing and RCM applicability shall be carefully examined and the GST liabilities shall be discharged accordingly.

4. Caution shall be exercised while reporting the said supplies in the GST returns.

Conclusion:

The GST framework for renting of motor vehicles has evolved through a series of notifications and clarifications, particularly concerning the applicability of reverse charge mechanism and input tax credit. Distinguishing between body corporate and non-corporate suppliers, and understanding the chosen tax rate option, are essential to ensure correct tax treatment. With the government’s clarificatory circulars and amendments, the ambiguities around tax liability and ITC eligibility have largely been addressed, offering greater clarity and compliance ease to stakeholders in the industry.

In conclusion, as we explore the impact of GST on services like renting of motor vehicles with operators, it’s just the beginning of our journey together. Author is committed to bringing you regular articles on a range of topics that shapes our daily lives. Stay tuned for more insightful discussions and valuable insights on various subjects!

Suggestions or feedback can be sent to the author on tabrez@hnaindia.co.in

The author extends special thanks to CA Roopa Nayak [roopa@hnaindia.com] and CA Thulasiram [thulasiram@hnaindia.com] for vetting this article.