Reverse Charge mechanism on Renting of any motor vehicle (Entry 15 of Notification 13/2017 as amended) was introduced with effect from Oct 01,2019. Even though it has been 2 years since its introduction, there are several interpretations resulting in divergent conclusions. The reason for such confusion is due to amendment of the entry in December 31,2019 and comparison of this entry with Goods Transport Agency (Entry 1 of Notification 13/2017).
Entry no 15 (As released in October) is reproduced below –
Category of supply of service – Services provided by the way of renting of a motor vehicle provided to a body corporate
Supplier of Service – Any person other than a body corporate paying CGST at the rate of 2.5% on renting of motor vehicle with input tax credit only of input service in the same line of business
Recipient of service – Any body corporate located in taxable territory
An apparent reading of this entry leads to multiple interpretations. However, the position of comma (,) in the aforesaid entry indicates the supplier should be a non-body corporate and the supply should attract GST @ 5% to trigger reverse charge. This can also be corroborated with the intent of law-maker from the following extract of press release dated September 20, 2019 issued by the Ministry of Finance – 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.
Considering the above, it is important to analyse under what circumstances GST is chargeable at 5% on renting of vehicles –
‘Renting of motor vehicle’ service is covered under two categories:
(i) HSN 9966 (Rental services of transport vehicles with operators) and
(ii) HSN 9973 (Leasing or rental services without operator).
A perusal of the Notification No.8/2017-Integrated Tax (Rate) indicates that 5% rate is not directly prescribed under HSN 9973(18%). However, GST @ 5% is prescribed under HSN 9966 for the following service:
Nature of Service: 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 that credit of input tax charged on goods and services used in supplying the service, other than the input tax credit of input service in the same line of business (i.e. service procured from another service provider of transporting passengers in a motor vehicle or renting of a motor vehicle) has not been taken.
Rate of 12 % is applicable if the Supplier wishes to avail the credit on his inward supplies.
From a combined reading of the aforesaid entries, if all the following conditions are satisfied, the recipient is liable to pay GST under reverse charge –
- The supply of service is renting of motor vehicle;
- The motor vehicle is designed to carry passengers (i.e., the vehicle should be used only for passenger transport, as per the Registration Certificate of the vehicle);
- Such renting is with operator;
- The cost of fuel is included in the consideration charged from the recipient;
- The supplier is registered under the GST law;
- The supplier is not a body corporate;
- The recipient is a body corporate located in taxable territory;
- The supplier does not charge GST @ 12% in the invoice issued for outward supply.
“Renting of motor vehicle” service vs. “Passenger transport” service –
Renting of motor vehicle, designed to carry passengers, with operator (HSN 9966) is often confused with passenger transport service (HSN 9964). Hence, it is vital to understand the difference.
|Particulars||HSN 9966 (Renting of Motor Vehicle)||HSN 9964 ( Passenger Transport Service)|
|Control over vehicle||The recipient defines how and when the vehicle will be operated, determining schedules, routes and other operational considerations – thus, supplier has little control||Generally undertaken over pre-determined routes on a pre-determined schedule – hence, supplier has more control|
|Billing Basis||On time not generally dependent on distance||Usually on time and distance|
|Examples||1. Rental of bus / coach / car
2. Hourly rental service by taxi aggregators (e.g., Ola Rental, Uber Hire)
|1. Transport by bus / auto
2. Transportation of students between home and educational institution
3. Motorised Taxi services
It should also be noted that both the aforesaid supplies are distinct from finance lease (HSN 9971) and rental service without operator (HSN 9973). However, the possibility of mix-up is less vis-à-vis HSN 9966.
What is included under “body corporate”? What is not?
Explanation (b) of the Notification No.10/2017-Integrated Tax (Rate) draws the definition of “Body Corporate” from Section 2(11) of the Companies Act, 2013. The latter reads
“Body Corporate” 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;”
A Limited Liability Partnership (LLP) is also a body corporate, with legal entity separate from its partners and has a perpetual succession. However, Explanation (e) of the Notification No.10/2017-Integrated Tax (Rate) explicitly provides that an LLP should be considered as a partnership firm / firm.
Considering the above, a body corporate (for the purpose of reverse charge) covers a domestic company and a foreign company but does not include a registered co-operative society or an LLP.
Therefore, to attract reverse charge on renting of motor vehicle –
Supplier should be a non-body corporate (for example, individual / Hindu Undivided Family / firm / LLP / registered co-operative society) registered under the GST law AND Recipient should be a body corporate located in taxable territory (for example, domestic company).
Reverse Charge on Renting of Motor Vehicle – Amendment Clarificatory or Expansive!
Reverse charge mechanism on ‘renting of motor vehicle’ service was introduced from October 01, 2019. Since the complex language used in the notification(s) confused many, the Government substituted the reverse charge entry effective December 31, 2019.
Now let us assess if it is merely clarificatory in nature (as claimed by the Government) or if the scope is enlarged.
Amended Reverse Charge Entry –
For the sake of clarity, the amended reverse charge entry under Notification No.10/2017-Integrated Tax (Rate) is reproduced herein below:
Category of Service –
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.
Supplier of Service –
Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging integrated tax at the rate of 12 per cent to the service recipient
Recipient of Service –
Any body corporate located in the taxable territory.
Clarificatory or Expansion in Scope?
The reverse charge entry (till December 30, 2019) defined the scope of supplier as one paying GST @ 5%, which indicates the supplier must be registered under the GST law. On the other hand, the amended entry defines the scope of supplier as one who does not charge GST @ 12%, which indicates the supplier could be either registered or unregistered under the GST law. Hence, it is apparent that the scope of the reverse charge entry is enlarged. Nevertheless, vide paragraph 6 of Circular No.130/2019 dated December 31, 2019, the Government clarified the said amendment as merely clarificatory in nature, effectively making it retrospective. Perusal of paragraphs 4 and 5 of the said Circular lends credence to that approach albeit ambiguously. If this is the intent of law-maker, one more amendment or clarification may be in the offing! Else, years down, a shrewd taxpayer may litigate the expansion in scope!
As it is well settled as per various judicial pronouncements that amendments which are made retrospectively cannot increase the scope of a provision in any law. Moreover government too has clarified the same through Circular No 130/2019. So it can be concluded that RCM u/s 9(3) of CGST Act,2017 (or under IGST Act) is NOT APPLICABLE if the SUPPLIER IS UNREGISTERED.
Source : vsrca.in