Service tax under reverse charge mechanism in case of renting of any motor vehicle designed to carry passengers

As per provision in the Finance Act, the service tax shall be paid by service provider. However, as per provision of section 68(2) of the act, service tax shall also be paid by the recipient of the service. The notification no. 30/2012 dated 20.06.2012, notifies the person and the extent of service tax payable by such person other than the service provider. List of services payable under reverse charge is enumerated in the said notification. Of all the services listed in the said notification, I would like to discuss in this article about the service tax liability in case of renting of motor vehicle designed to carry passengers.

The extent of service tax in case of renting of any motor vehicle designed to carry passengers is depend on whether the provider of service has availed abatement or not. The condition to avail abatement is provided vide notification 26/2012 dated 20th June, 2012. The condition for abatement as amended recently is depicted from the notification as below:

(i) CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004;

(ii) CENVAT credit on input service of renting of motor cab has been taken under the provisions of the CENVAT Credit Rules, 2004, in the following manner:

(a) Full CENVAT credit of such input service received from a person who is paying service tax on forty percent of the value; or

(b) Up to forty percent CENVAT credit of such input service received from a person who is paying service tax on full value;

(iii) CENVAT credit on input services other than those specified in (ii) above, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

On fulfilling the conditions laid down as above in the said notification the service tax payable shall be restricted to 40% of the liability only.

The proportion of the liability of 40% payable by provider of the service is NIL and the recipient of the service shall pay 100% of the service tax. The 100% of service tax here would mean that only 40% of the service tax shall be paid by the recipient of the service as per notification no.30/2012.

If the above mentioned conditions as laid down in the notification are not satisfied then the liability shall be 100% of service tax. In such case the service tax payable shall be paid equally by the service provider and the service recipient.

From the above discussion, it is clear that if the value of service is abated then the liability of service recipient under reverse charge would be only 40% and the liability of provider of service to pay service tax is NIL. And if the value is non-abated then the liability of paying service tax by service recipient and service provider is 50% each. It means if the service provider avails abatement it is beneficial for both the service provider and service receiver. However, the service provider shall have to mention on the face of the invoice that he has availed abatement which would help both service provider and service recipient to support their stand during audit.

This article is for academy purpose only.

Ganeshan Kalyani

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  1. Ankit sarna says:

    My company is taking services of vehicle vendor and the vendors are specified as company and individual both but they are not charging service tax on there invoices raised to us.
    whether this comes under the ambit of service tax or Reverse charge mechanism.

  2. JYOTI MITTAL says:

    I would seek to ask that the abatement has been a bit modified through notification 08/2014 bringing thereby the word ‘motor cab’ in place of ‘motor vehicle’ earlier. Won’t this restrict the scope of abatement. Further, in reverse charge the expression is ‘motor vehicle’ only (Though notification 10/2014 is in relation to this only but it amends the rate of tax payable by provider & receiver, keeping the descripttion intact). If you may please elaborate upon this inconsistency between the provisions of abatement & RCM, the scope of both when we are to assess about hiring of bus.

  3. Mahesh Dahal says:

    Service provider is private limited company and we are body corporate.Do we need to pay service tax on care hire chages?
    Please help.

  4. AKHIL says:

    Hi sir, My Service provider is individual and he is registered in service tax and on bill he has not charged any service tax then please tell me on what amount i need to pay the service tax?

    1. Tarun says:

      Motor Vehicle means a vehicle designed to carry 6 Passenger excluding driver. so two wheelers will also come but the said services should be of renting not transportation service for the purpose of reverse charge.

    1. Ganeshan says:

      If an individual provides car to a company – 1) car provider avails abatement, then it has foregone credit and therefore it is out of service tax liability and service recipient shall pay service tax on 40% of the value, as given in abatement notification. Second is provider does not opt for abatement then it shall charge service tax on 50% of invoice and rest shall be borne by the recipient of service under reverse charge mechanism.

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