GST on Renting of Motor Vehicle
GST on Renting of Motor Vehicle
The indirect tax implication on renting of motor vehicles service has always driven the attraction because of its complicated abatement/ exemption treatment in the erstwhile law. In recent years, renting of motor vehicle service (also more popularly known as rent-a-cab service) has increased in leaps and bounds. Now, even a common man is aware and are frequently using the cab service.
Under the current article, we would understand the GST provisions as applicable to renting of motor vehicle service.
Understanding GST on renting of motor vehicle services
GST rates on renting of motor vehicle services have been prescribed under notification no.11/2017-Central Tax (Rate) dated 28.06.2017, the same is explained hereinbelow:
|
Description of Service |
GST rates |
Conditions |
| Renting of a motor vehicle which is designed to carry passengers (wherein the cost of fuel is included from the service receiver) |
CGST–2.5% SGST–2.5% Total–5% |
Provided that credit of the input tax charged on goods and services used in supplying the services has not been taken.
However, an input tax credit of input services in the same line of business can be availed. |
| Or | ||
|
CGST–6% SGST–6% Total–12% |
NIL | |
| Rental services of transport vehicle (with or without operators) |
CGST–9% SGST–9% Total–18% |
NIL |
According to the above-referred notification, the motorcar service provider has the following two options, in terms of GST rates:
- To pay GST @5%, wherein, the input tax credit shall not be available (an input tax credit of only input service of the same business line can be availed); or
- To pay GST @12%, wherein, the input tax credit is available.
Reverse Charge Mechanism
The Reverse Charge Mechanism (RCM) has been introduced by the Government of India (GoI) for the vehicle rental business. The GoI observed that the majority of the assessees operating the vehicle rental business belonged to the unorganised sector. Also, the small enterprises operating in the field of vehicle rental business could not obtain registration under GST, file returns and make payment of GST. To address the issue, the Central Board of Indirect Taxes and Customs (CBIC) introduced circular no.130/49/2019 on 31st December 2019. The circular was issued based on the recommendations of the 37th GST Council meeting. The circular makes the RCM mandatory for assessees in the vehicle rental business on the satisfaction of the specified conditions. By introducing the circular, the GoI aims to provide relief to assessees in the vehicle rental business since they are exempt from the requirement to pay GST.
RCM is a broad concept which applies to the assessees covered by section 9(3) of the Central Goods and Services Tax (CGST) Act, 2017. Generally, the supplier of the products is liable to pay GST. However, under the RCM, the customer is liable to pay GST. The RCM applies automatically in the case of imports and purchases made from unregistered dealers. It also applies to the list of goods and services specified by the Ministry of Finance as per Notification No.13/2017-CT(R) dated 28th June 2017.
Conditions for Applicability of RCM
- The assessee should not be a company or limited liability partnership (LLP)
- The assessee should be engaged in the commercial service of supplying motor vehicles on rent
- The motor vehicle should be a commercial vehicle designed exclusively to carry passengers [The assessee may be doing business with pick-up trucks or other types of multi-utility vehicle (MUV). In such cases, the vehicle can accommodate both goods and passengers. Hence, the RCM will not available for the assessee when the vehicles fall under the MUV category.]
- The cost of the fuel should not be borne by the assessee (Hence, the price of the fuel should be included in the rent.)
- The service should be supplied to a company or LLP
- Five per cent GST should be charged on the service, and the applicability of the five per cent rate should be mentioned in the invoice provided to the customer
- The assessee should claim Input Tax Credit (ITC) exclusively from invoices which have been raised by assessees in the same line of business
- The assessee should not claim ITC for invoices relating to a business which does not fall under the Services Accounting Code (SAC) 9964
- The buyer of the service should be located in India
- The invoice issued by the assessee should mention that the GST rate on the transaction as five per cent
Impact of the Circular for RCM Assessees
- The assessee who is making the supply will charge five per cent GST on the rent charged from the customer.
- The assessee need not make a remittance of GST because the customer should bear the responsibility to make the payment.
- There is no scope for partial implementation of the RCM. Hence, the customer should pay the GST in full.
- The GST paid by the supplier on input goods and services will lapse. The assessee may have paid GST on input items for conducting the business of renting out motor vehicles. In such cases, the input is used to further the course of the business. However, it is not possible to claim ITC since the RCM applies to the assessee. Refund of ITC is also not allowed.
- The assessee who supplies the vehicle rental service cannot claim ITC since the customer remits the GST.
- Since the benefit of ITC is not available to the assessee, the price of the services and products sold by the assessee will be higher. The higher price is ascertained based on a comparison made with an assessee who can avail of the ITC.
- The assessee may be making a supply of multiple goods and services. In such a case, the amount of ITC which can be attributed to the vehicle rental business will be proportionately disallowed. Hence, the GST paid on inputs for the vehicle rental business cannot be set off against any GST liability. The disallowed GST will remain disallowed permanently.
- The assessee is paying tax on input items. The input items relate to the business of the assessee. Since the assessee is registered under GST, the assessee should apply GST in all the invoices raised. However, the assessee cannot use the input GST to adjust the GST liability on the GST invoices raised. Hence, there is a breakage in the tax chain.
- Breakage in the tax chain refers to a situation where GST is raised in the invoice, but the ITC benefit is denied. As a result of breakage in the tax chain, the assessee is unable to sell products to customers at competitive prices.
Impact of the Circular for Regular Assessees
Assessees who are not covered by the RCM have the option to choose a five per cent GST rate with restricted ITC. Alternatively, the assessee can opt for a twelve per cent GST rate with the availability of complete ITC benefit. In both of the cases, there is no breakage in the tax chain. Hence, the assessee can sell the products to customers at competitive prices. The impact of the options is explained below:
Five per cent GST
- The assessee can opt for a five per cent GST rate. In such a case, the options available to the assessee to claim ITC will be restricted.
- In such a scenario, the assessee will be able to avail of ITC exclusively from invoices which have been raised by assessees in the same line of business. Further, the assessee will be able to claim ITC exclusively for invoices relating to businesses which fall under the SAC 9964.
- The assessee is allowed to be compensated for the input items on which ITC is not allowed. The compensation is available because the tax rate is five per cent only. The assessee recovers the ITC partly by set off and partly by the concessional tax rate of five per cent. Hence, there is a minimal breakage in the tax chain, which is compensated by a concessional GST rate.
Twelve per cent GST
- The assessee can opt for a twelve per cent GST rate. In such a case, there is no restriction on the availability of the ITC. In such a scenario, the assessee will be able to avail of ITC for all invoices received for input items. ITC will be allowed if the input goods and services are related to the vehicle rental business.
- There can be items used indirectly in the course of the business. Indirect items can include packing items, electrical spares, consultancy fees for manpower services and other items. The assessee is allowed to claim ITC for indirect items also.
- ITC is available for all items used as input in the furtherance of the business. Hence, there is no breakage in the tax chain.
The circular is given below for reference:
GST-on-Renting-of-Vehicles-RCMSummary
The GST provisions as applicable to renting of a motor vehicle are summarised hereunder:
|
Service provider |
Service Receiver | Reverse charge mechanism |
GST rates |
| Any person other than body corporate | Body Corporate | Applicable | 5% |
| Body corporate (not availing any input tax credit) | Body corporate | Applicable | 5% |
| Body corporate (not availing any input tax credit) | Non-Body corporate | Not Applicable | 5% |
| Body corporate (availing input tax credit of input service of same business line) | Any | Not applicable | 5% |
It is interesting to note here that the service provider, as seen above, has the option to pay GST @12% by availing full input tax credit. However, practically, with the introduction of the reverse charge mechanism on renting of the motor vehicle, the service provider will no longer have the option to pay GST @12% by availing full input tax credit. The service provider, after reverse charge introduction, is left with only one option, i.e. to pay GST @5% without availing input tax credit.
