GST Reverse Charge on Renting of Motor Vehicle – Demystifying

Reverse charge mechanism on ‘renting of motor vehicle’ service was introduced with effect from October 01, 2019. Although it has been over 50 days since introduction, the complex and ambiguous language used in the notification(s) continues to confuse many. Hence, this post intends to understand the said provision and give a simplified view.

For the sake of clarity, the reverse charge entry under Notification No.10/2017-Integrated Tax (Rate) is reproduced herein below:

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:

 “16. 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. However, GST @ 5% is prescribed under HSN 9966 for the following service:

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:

1. The supply of service is renting of motor vehicle;
2. 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);
3. Such renting is with operator;
4. The cost of fuel is included in the consideration charged from the recipient;
5. The supplier is registered under the GST law;
6. The supplier is not a body corporate;
7. The recipient is a body corporate located in taxable territory; and
8. The supplier does not charge GST @ 12% in the invoice issued for outward supply.

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.

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.

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- (i) a co-operative society registered under any law relating to co-operative societies; and (ii) 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, inter alia:

• Supplier should be a non-body corporate (for example, individual / Hindu Undivided Family / firm / LLP / registered co-operative society) registered under the GST law;
• Recipient should be a body corporate located in taxable territory (for example, domestic company).