If supplier who provides the service of renting of motor vehicle opts for GST @ 5%, then the said service is covered under RCM
Generally, under GST provisions, the liability of pay tax rests on supplier. However, in certain cases the liability to pay GST to the government falls on the recipient. This is known as reverse charge mechanism which is covered under Notification No. 13/2017- Central Tax (Rate). As per section 2(98) of CGST Act’ 2017, “reverse charge” means the liability to pay tax by the recipient of the supply of goods or services or both instead of the supplier of such goods or services or both.
The Governor of the National Capital Territory of Delhi, on the recommendations of the Council amended the notification of the Government of the National Capital Territory of Delhi, in the Department of Finance (Revenue-1), No.13/2017- State Tax (Rate), dated the 30th June, 2017.
Notification No. 22/2019- Central Tax (Rate) dated 30th September, 2019
The said notification notified services provided by way of renting of a motor vehicle provided to a body corporate located in the taxable territory, by any person other than a body corporate, paying central tax at the rate of 2.5% on renting of motor vehicles with ITC only of input service in the same line of business under RCM. This was covered under Entry No 15.
Notification No. 29/2019- Central Tax (Rate) dated 31st December, 2019
There was ambiguity among the taxpayers in regard to the applicability of the reverse charge on the renting of motor vehicle. Hence, Government clarified that:
There are only two rates applicable on the service of renting of vehicles, 5% with limited ITC and 12% with full ITC.
- Where the supplier of the service charges GST @12% from the service recipient, the service recipient shall not be liable to pay GST under RCM
- Where the supplier of the service doesn’t charge GST @ 12% from the service recipient, the service recipient shall be liable to pay GST under RCM
The above notification was introduced to amend Notification No. 22/2019- Central Tax (Rate).
The government notified the amendment of Entry No 15 which now said that, services provided 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 located in the taxable territory, shall be covered under RCM.
In other words, suppliers of service 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 have an option to pay GST either at 5% with limited ITC of input services in the same line of business or 12% with full ITC.
The condition is that the credit of input tax charged on goods or services used in supplying the service has not been taken, it shall mean that:
- credit of input tax charged on goods or services used exclusively in supplying such service has not been taken; and
- credit of input tax charged on goods or services used partly for supplying such service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of such service is an exempt supply and attracts provisions of section 17(2) of the CGST Act, 2017 and the rules made thereunder.
“Body corporate” for the applicability of reverse charge has same meaning as assigned to it in section 2(11) of the Companies Act, 2013 which includes a private company, public company, one personal company, small company, Limited Liability Partnerships, foreign company etc.
“Body corporate” or “corporation” includes a company incorporated outside India, but does not include:
- a co-operative society registered under any law relating to co-operative societies; and
- any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;
Is the GST paid under reverse charge eligible for input tax credit?
Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Government has put restriction on input of renting of motor vehicle under section 17(5), which states that input tax credit shall not be available in respect of renting or hiring of motor vehicles except when used for the purpose specified therein.
Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply.
Hence, input would be available only if registered person paying GST under reverse charge engaged in same line of business.
What compliances are required to be followed in respect of supplies under RCM?
- As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge.
- This also needs to be mentioned in receipt voucher as well as refund voucher. (if tax is payable under RCM)
- Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge
- Any amount payable under RCM shall be paid by debiting the electronic cash ledger.
- Reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.
- Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.
- Advance paid for reverse charge supplies is also leviable under GST. The person making advance payment has to pay tax on reverse charge basis.
The service of renting of motor vehicles, has been bring under the mechanism of reverse charge for the purpose of relief to the suppliers which are small businesses and are transport service provider as we have discussed already and not to create an additional burden on the service recipient. There are only two rates in GST for renting of motor vehicle i.e., 5% with ITC in same line of business and 12% with full ITC. Meaning thereby, if supplier does not charge GST @ 12% in the invoice, it means he needs to opt it for GST rate @5% and therefore, when he opts for this rate, then service automatically shifts into reverse charge mechanism. Accordingly, if taxpayer opts for GST @ 5%, then the said service is covered under reverse charge mechanism.