Basis recommendation by the GST council in its 37th meeting held on 20 September 2019, Central Board of Indirect Taxes and Customs (CBIC), had issued a notification to place supply of renting of motor vehicles under the gamut of reverse charge mechanism. The recommendation was specifically intended to cover only those supplies made by non-body corporate to a body corporate and which were subjected to GST rate of 5% with restricted input tax credit.
However, the wordings of the notification no. 22/2019 – CT (Rate) dated 30 September 2019 (which was issued to give effect to the GST councils recommendation) i.e. “any person other than a body corporate, paying central tax at the rate of 2.5%…” created a few concerns viz. the scope of the entry and whether by virtue of the entry both service provider and service receiver would be liable to pay GST.
Having received concerns, the CBIC have substituted the entry, vide notification no. 29/2019 CT (Rate) dated 31 December 2019. The substituted entry is reproduced as under:
|“15||Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of the fuel is included in the consideration charged from the service recipient, provided to a body corporate||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 service recipient.||Any body corporate located in the taxable territory.”|
Though the above substitution was intended to eliminate doubts, it has now created a new doubt in the minds of corporate tax payers as to whether the scope of the revised entry also covers supplies made by an unregistered supplier. The relevant phrase is as under:
“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 percent.to the service recipient”
The article intends to provide a food for thought on the possible interpretation of the scope of the revised RCM entry by analyzing the provisions under the CGST Act, the circular issued in the regards and the general understanding of the GST laws and the reverse charge provisions under the erstwhile indirect tax laws.
Prior to the advent of the GST law in India concept of reverse charge mechanism was prevailing even under the erstwhile indirect tax laws, i.e. service tax provisions, the Central Excise laws and the VAT laws.
Under the service tax laws the reverse charge mechanism was restricted only to specified types of services viz. goods transport agency services, sponsorship etc. It also had a concept which was referred as the ‘partial reverse charge’ mechanism wherein the burden of payment of service tax were shared both by the service provider as well as the service recipient.
Similarly, under the excise laws, procurement of molasses produced in a Khandsari sugar factory was subjected to RCM in the hands of the procurer.
Correspondingly, under the VAT laws there existed a concept which was popularly known as the URD purchases. Under the said mechanism purchases from unregistered dealers was subjected to levy of VAT under reverse charge.
All the above three mechanisms have been adopted in the GST law by virtue of section 9 (3) and section 9 (4) of the CGST Act. While sub-section (3) covers the situation where RCM has been made applicable to notified supply of goods or services, sub-section (4) has covered supplies received from unregistered dealers.
The notification, which had brought renting of motor vehicle under the gambit of RCM has been issued under section 9 (3), which would effectively mean that it (renting of motor vehicle) is a specific notified service on which reverse charge mechanism would apply. Additionally, it would also mean that such notified supply would be covered under RCM irrespective of the fact whether the supplier is a registered supplier or an unregistered supplier. It thus becomes important to understand whether the mechanism is applicable to all supplies in the nature of renting of motor vehicle (other than those which are subjected to the GST rate of 12 per cent) or does it have a restricted application.
The possible answer to its applicability can be derived from what has been approved and recommended by the GST council and which forms the basis for introducing the aforementioned entry with the scope of the RCM. In serial no. 16 of the Press note which was released post the council meeting the intention and the scope can be clearly seen. The press note is reproduced as under:
“16. To allow RCM to suppliers paying GST @5% on renting of vehicles from registered person other than body corporate (LLP, proprietorship) when services provided to body corporate entities.”
It can be seen from the above, that the scope of the RCM is restricted only to those cases where the supplies have been received from a registered non-body corporate. The said fact has also been re-iterated in para 2 of the recently released clarificatory circular (the relevant abstract is reproduced as under)
“The GST Council in its 37th meeting dated 20.09.2019 examined the request to place the supply of renting of motor vehicles under RCM and recommended that the said supply when provided by suppliers paying GST @ 5% to corporate entities may be placed under RCM. “
However, in spite of what has been approved and recommended by the GST council, and the legal provision, the wordings used in the notification is definitely prone to litigation.