RCM on Renting of Motor Vehicle – nuances for examination

[Gella Praveenkumar]

GST payable on Reverse charge mechanism under Section 9(3) of CGST Act, 2017 has got a new family member under the service category “Renting of a motor vehicle”, w.e.f. 01.10.2019.

Insertion to be made for the above in Original Notification 13/2017 dtd: 28.06.2017 vide new Notification No.22/2019 dtd: 30.09.2019. Entry in this regard is read as below:

Sl. No.	Category of Supply of Services	Supplier of service	Recipient of Service
15	Services provided by way of renting of a motor vehicle provided to a body corporate.	Any person other than a body corporate, paying central tax at the rate of 2.5% on renting of motor vehicles with input tax credit only of input service in the same line of business	Any body corporate located in the taxable territory.

“Body Corporate” has the same meaning as assigned to it in clause (11) of section 2 of the Companies Act, 2013.

The above entry implicates the recipient who happens to be a Body corporate located in Taxable territory to pay GST on RCM basis for receipt of services in relation to “Renting of a motor vehicle”.

Detailed aspects to kept in mind by the Service Recipient who happens to be a Body Corporate, for payment of GST on RCM basis is as per below:

• Services received are in relation to Renting of Motor vehicle alone are covered for above entry
• Service provider is other than a Body Corporate i.e. an Individual or a Partnership firm or AOP/BOI
• The above said Service provider has not availed benefit of ITC other than the GST charged by a person in the same line of business
• Service provider charges GST on such Renting services @ 5% [2.5%+2.5%] on the services rendered

It is quite important to examine the nature of the Contract between the Service provider and Recipient i.e.”Renting” and the position of service provider along with the benefit of Input tax being availed for making the payment of Tax under RCM.

The above entry is a copy-cat from erstwhile Service Tax law which has created abundant litigation for applicability and payment of tax on RCM. After a span of two years of GST implementation, entry for the above category in the RCM list is very unclear in entirety towards its entry and language used. Reference to SAC with couple of examples is strongly recommended by the law makers to ZERO down the interpretational issues and for a proper compliance by the Registered person.

A mere examination of the words “Renting of a Motor Vehicle vis-à-vis Passenger Transportation Service” on different attributes listed as below indicates the interpretational difference existing to have a clarity for compliance in this regard.

Key attribute	Renting of a Motor Vehicle	Contract for Transport of employees or Passenger
Intent	Hire of a motor vehicle with or without a Driver	To pick & drop the desired list of employees or passengers at the instruction of the employer
Periodicity	On need basis	On a continuity basis
Pricing	Basic fare + variable component on use basis	Fixed fare + variable component for kms or extra hours
Knowledge on place of use	Usually not a pre-condition to specify the location/ destination for such renting of a motor vehicle	Pre-defined specific route shall be confirmed. On need basis within a territorial jurisdiction the motor vehicle shall ply as per the contract
Risk & responsibility	Owner of the vehicle casts responsibility on the buyer for proper maintenance of such motor vehicle in the course of contract period to use such vehicle	Owner of the vehicle takes ultimate responsibility to upkeep and maintain the vehicle in proper working condition and little responsibility casted on the recipient for its usage

From above aspects of examination, most of the Body Corporate do have an intent for Employee/Passenger transportation rather than mere hiring of a motor vehicle. Interpretation of the above entry by the judicial authorities other way round to classify the “Employee Transportation” cost hit to Profit & Loss Account as Rental Service and not to be attributed to be as “Transportation of Employee/passenger” is going to cause plethora of litigation under GST. Assuming for a moment, the above stand of the authorities concerned gets a dictum from the superior authorities, establishing the fact that Service provider has complied with GST in relation to payment of taxes on above entry shall be an additional burden in future. Learning from present litigation under Service tax, many courts have upheld that tax cannot be collected twice for the same transaction, where service provider has paid the tax duly though the responsibility of payment of tax has been casted on the service recipient on RCM basis on the grounds of Revenue neutrality.

For all probabilities to face the situation, it is highly recommended that Service recipient tracks the legal compliance for payment of taxes and filing of returns for the taxes collected by the service provider where ambiguity exists to pay or not on RCM basis. Also, it is recommended to make a correspondence with the concerned jurisdictional authority for the stand taken by the body corporate towards their understanding of the legal provisions concerned and reason for non-payment of tax under RCM for the above entry with due reference to the contracts entered thereof for the services received.

Examining the Rate chart on the basis of classification of services laid out under Notification No.11/2017 dtd:28.06.2017 as amended duly from time to time, following are the entries relevant for our discussion:

Chapter, Section or Heading	Description of Service	Rate (per cent.)	Condition
Heading 9966 Rental services    of transport vehicles with operators	(i) Renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient.	2.5	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. [Please refer to Explanation no. (iv)]
		6	NIL

 

Chapter, Section or Heading	Description of Service	Rate (per cent.)	Condition
Heading 9964 (Passenger transport services)	(i) Transport of passengers, with or without accompanied belongings, by rail in first class or air-conditioned coach.	2.5	Provided that credit of input tax charged in respect of goods used in supplying the service is not utilised for paying central tax or integrated tax on the supply of the service
	(ii) Transport of passengers, with or without accompanied belongings by- (a) air-conditioned contract carriage other than motorcar; (b) air-conditioned stage carriage; (c) radio taxi. Explanation. - (a) “contract carriage” has the meaning assigned to it in clause (7) of section 2 of the Motor Vehicles Act, 1988 (59 of 1988); ….	2.5	Provided   that credit of input tax charged on goods and services used in supplying the service has   not been taken [Please refer to Explanation no. (iv)]
	(vi) Transport of passengers by any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient.	2.5	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. [Please refer to Explanation no. (iv)

Meaning of Contract Carriage as referred in Motor vehicle Act, 1988

"contract carriage" means a motor vehicle which carries a passenger or passengers for hire or reward and is engaged under a contract, whether expressed or implied, for the use of such vehicle as a whole for the carriage of passengers mentioned therein and entered into by a person with a holder of a permit in relation to such vehicle or any person authorised by him in this behalf on a fixed or an agreed rate or sum-          

(a) on a time basis, whether or not with reference to any route or distance; or          

(b) from one point to another; and in either case, without stopping to pick up or set down passengers not included in the contract anywhere during the journey, and includes-

(i) a maxicab; and

(ii) a motor-cab notwithstanding that separate fares are charged for its passengers;

Aspects to be considered for Conclusion:

A thorough examination of the attributes relevant for Renting service and Transportation service as per above, following points can be concluded:

1. Contract document has to be examined to establish “Renting of motor vehicle or Transport service”
2. Mere existence of a contract between a Body corporate [service recipient] and non Body corporate [service provider] cannot be construed to be a convincing activity to have existence of RCM for passenger transportation
3. Examining the relevant documentary evidence of service provider towards the rate adopted, service category, benefit of ITC availment are essential for future reference purpose on or after 01.10.2019
4. Further availability of Input Tax credit for the service recipient on the basis of Rate adopted for payment of GST has also to be clarified for the restriction imposed on Input Tax credit for a Service provider.

I see that the intent of the law maker is not to tax the Body Corporate for payment of taxes on RCM basis towards the expenses incurred on Employee Transportation, rather to tax upon the renting of motor vehicles alone. However, this scenario of Renting activity exists very rare occasion for a compliance due to non-existence of such contract for the Body Corporate. Most of the industry works upon the requirement of Passenger Transportation alone and not mere Renting of a motor vehicle.

FAQ’s:

1. If a company hires cab services for a shorter trips on day to day basis, will the above RCM be applied?

Ans. No. The services availed by the company is of Passenger transportation and not for hiring of Motor vehicle and accordingly payment of tax on RCM basis is not required. Each of these shorter trips shall be with a specific guideline of pickup & drop location with clarity

2. Obtaining the services of Aggregator such as OLA or UBER, does it call for payment of GST on RCM basis?

Ans. No. The above services are of Passenger transportation on distance basis and not chargeable under the category “Renting of Motor vehicle. Also, a reference to Section 9(5) of CGST Act, 2017 is relevant to examine the position of Aggregator to pay tax for this service and levy under Section 9(3) shall not be attracted

3. Service provider is a Proprietary concern who charges GST @12% for the employee related pickup & drop service. Does the recipient need to pay tax on RCM

Ans: No, there is no necessity to pay Tax on RCM

Disclaimer:

The above views expressed are as per the understanding of the present GST provisions by the author. Any corrections or suggestions may be sent to praveen@gella.in. It is recommended to take expert opinion for having better clarity in this regard