RCM on renting of motor vehicle under GST

This article brings about clarity on various aspects of Reverse Charge Mechanism (RCM) applicability on supply of renting of motor vehicle designed to carry passenger by a person other than a body corporate to a body corporate where the cost of fuel is included.

Let’s understand the definition of Motor Vehicle before we proceed further:

Motor vehicle has not been defined in the GST laws therefore we need to refer the Motor Vehicle Act, 1988 where Motor Vehicle or Vehicle means any mechanically propelled vehicle adapted for use upon roads 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 25 cubic centimetres. Examples would be cars, buses, vans etc. However, renting of cranes, bull dozers etc. would be out of the scope of this notification.

Here renting of motor vehicle would give the recipient of service the right to enjoy the use of motor vehicle for a specific duration with / without a driver unlike passenger transport services where the destination of the said carriage is fixed.

The Central Government had amended the notification No.: 13/2017- Central Tax (Rate), dated the 28th of June 2017 to include the services of renting of motor vehicle provided to a body corporate. The said notification was further amended through Notification No. 29/2019-Central Tax (Rate), dated 31st December 2019 to include the words “motor vehicle designed to carry passengers where the cost of fuel is included in the consideration”. On this note we can interpret that erstwhile notification covered all kinds of renting of motor vehicles under RCM. Through subsequent amendment of the said notification, we understand that only those motor vehicles designed to carry passengers shall be considered for RCM.

Further, circular No.: 130/49/2019 dated, 31^st 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:

• Where supplier of service has issued an invoice charging GST @12% from the recipient the same would be liable for forward charge
• Where supplier of service has refrained from issuing 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 other than a body corporate to a body corporate.

The supplier has an option to issue an invoice @5% when supplied to other than a body corporate by availing limited ITC. Here limited ITC would mean ITC on input services which is into similar business line.

The various complexities of transactions would be easier to understand with the help of below flow chart:

Our comments:

A person who is required to make payment under RCM shall compulsorily get himself registered under GST laws and shall discharge the applicable liability under RCM. As per section 17(5) of the CGST Act 2017 ITC is blocked in cases of renting of motor vehicle except under few specified circumstances.

Let us take an example of ABC Travels (non body corporate) renting out motor vehicle to a body corporate where ITC is disallowed to such body corporate. In this case the body corporate would not be willing to accept an invoice where the supplier has charged GST @12%. However, the difficulty does not stop here, as it will block credit for the supplier if he agrees for 5% tax rate where the tax would be required to be discharged through RCM by the recipient of services i.e. the body corporate.

Few questions which may arise in the minds of the readers:

a. Whether RCM would arise when ABC Travels (whether a body corporate or not) being unregistered supplier supplying services to a body corporate?

Ans: The answer to this question is affirmative and RCM would be triggered in the following case.

b. Whether service provider can charge various rates of 5%/12% to various service recipient depending upon how beneficial it would be for supplier/recipient of service?

Ans: The answer to this question here remains uncertain as to whether it is feasible to take various approach of discharging tax under various rates based on how beneficial it would be for the supplier/recipient.

*****

Published By:- CA Ramnath M. Shanbhag

Disclaimer: The facts and opinions written in this column are those of the author and have been prepared based on relevant provisions and information available at the time of preparation. The article does not constitute any professional advice or a formal recommendation. The author has undertaken the utmost care to disseminate true and correct views and does not accept liability of any errors or omissions.