Classification of services relating to vehicles – rental, leasing, transportation and RCM

[Shilpi Jain]

Considering the changes made by the notifications issued on 30^th Sep ’19, giving effect to the recommendations made by the GST Council in its 37^th meeting, it becomes necessary to summarise the various classification entries applicable to the renting, leasing and transportation services relating to motor vehicles, to understand which classification is meant for what kind of service. Also, a look at the provisions relating to the liability under reverse charge for renting of motor vehicles.

The major change in this regard vide the notification issued on 30^th Sep ’19 is that

1. The HSN 9966 relating to renting of road vehicles is made applicable only if done with operators, and
2. The HSN 9973 relating to leasing and rental of machinery and equipment is made applicable only when done without operators.

Earlier both these HSNs were applicable whether the services were provided with or without operators.

In the above backdrop, summarised below are the various classifications applicable to motor vehicles in relation to the services of rental, leasing and transport, along with the relevant rates of tax.

HSN	Nature of services covered	Rate of tax relating to motor vehicles	Remarks
9964 - Passenger transport services	These services are generally rendered on a distance-travelled basis/ time basis and to a specific destination or to more than one destination. Passenger transportation services over pre-determined routes on a pre-determined schedule.	5% - transport by contract carriage, stage carriage, radio taxi. 5% - Transport by any motor vehicle where fuel cost is included in the consideration.	Transporting from one place to another (example: hiring a cab to travel from point A to point B)
9966 - Rental services of road  vehicles with operators *	Service is for a period of time, not generally dependent on distance.	5% - Renting of any motor vehicle where fuel cost is included in the consideration. 12% - otherwise, where fuel cost is included 18% - residual entry when fuel cost is not part of the consideration.	Hiring for a period of time with operator, irrespective of the quantum of usage - example: renting a cab for 2 days
997114 - Financial and related services	Financial leasing services	Same rate of tax as on supply of like goods involving transfer of title in goods - Transfer of the right to use any goods	Purchase under a financial lease
9973 - Leasing or rental services without operator *	Operational lease – Leasing and rental services relating to machinery and equipment	Same rate of tax as on supply of like goods involving transfer of title in goods - Transfer of the right to use any goods or leasing or renting of goods.	Leasing or hiring, without operator –This classification is relevant with respect to machinery and equipment only and may not cover vehicles

 *- Prior to 1^st Oct ’19, these entries were applicable whether leased with or without operator. However, from 1^st Oct ’19 HSN 9966 is applicable only when rented with operator and HSN 9973 is applicable when rented without operator.

It is not clear as to what is intended from the above referred change from 1^st Oct ’19 for the reason that the goods covered under the two HSNs i.e. 9966 and 9973 are different. HSN 9973 covers different kinds of machinery and equipment whereas HSN 9966 covers transport vehicles. Vehicles and machinery & equipment are different types of goods. However, a look at entry No. 17(vi) – ‘Leasing of motor vehicles purchased and leased prior to 1st July 2017’ in the rate notification 11/2017-CTR suggests that the Government intended to classify leasing/renting of motor vehicles also under HSN 9973 and have not considered it to be applicable only for equipment and machinery.

Hence, for a moment if it is assumed that HSN 9973 covers renting/leasing of motor vehicles (assuming 997329 – leasing or rental services concerning other goods) then the following could be the implication for the vehicles rented out before 1^st Oct ’19 without operators:

1. Prior to such date the said service would have been classified under HSN 9966 wherein the rate of tax was 5% or 12% (maximum 18%).
2. From 1st Oct '19, since the rental or leasing is without operators, the classification would be HSN 9973 wherein the rate of tax would be the same as applicable to the motor vehicle.

This could substantially increase the tax costs (if the rate under 9973 is higher than that under HSN 9966) as the credit relating to renting or hiring of motor vehicles is blocked u/s 17(5) of the CGST Act. In case of a reduction in the tax rate (if the rate under 9973 is lower than that under HSN 9966) then the requirement of passing on the tax benefit to the customer as per the anti-profiteering provisions u/s 171 of the Act.

Another aspect to be noted is that the terms ‘renting’ and ‘leasing’ are not very different and are generally used interchangeably. Thereby, before 1^st Oct ’19, an ambiguity existed regarding the classification of the motor vehicle renting services i.e. whether to be classified under HSN 9966 or 9973 (as both were applicable for the motor vehicle renting services)? Hence maybe the need for the amendment vide the notification dated 30^th Sep ’19 for making HSN 9966 applicable when motor vehicle is rented with operator and HSN 9973 being applicable when motor vehicle is rented without operator!

Reverse charge on renting of motor vehicle services

W.e.f 1^st Oct ’19, the services relating to renting of motor vehicles would also be liable under reverse charge if:

1. The services are provided by a person other than a corporate,
2. Services are provided to a corporate, and
3. The service provider is paying tax @ 5% i.e. he is registered and has included the cost of fuel in the consideration charged and is not availing any credits other than the credit relating to renting of motor vehicle.

This throws out the following points for consideration:

• The services by an unregistered person would not be liable under reverse charge as in such case the condition mentioned in ‘c’ above would not be satisfied.
• Services provided by corporate suppliers would not be liable under reverse charge.
• Proprietorship concerns, partnership firms, etc. i.e. persons other than corporate would not be liable under reverse charge mechanism for this service.

However, if we assume a case where a person provides only renting of vehicle services and as per the recent amendment if all his services are liable under reverse charge, then as per notification 5/2017 CT such person would not be liable to registration under GST. In such a situation the condition ‘c’ mentioned above would not be satisfied and thereby no RCM liability. This would then require the service provider to register as per the provisions of section 22 of the Act as notification 5/2017 would be inapplicable. This would require such person to be registered and file his returns periodically and make all the compliances even if he is not liable to pay any tax.

It has been seen from the time of implementation of the law that a large number of amendments are being carried out. Certain amendments require a relook at the past transactions, implication on the future transactions and whether any restructuring required of the business itself.  It is a very dynamic environment in which the implementation of the law is presently and requires the businesses to be responsive to the changes.

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CA Shilpi Jain