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Shaaransh Sharma

September 2, 2024

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Basics of GST

RCM on Vehicle Hire Charges under GST

With the introduction of GST in India, a lot of services have been covered under the Reverse Charge Mechanism (RCM), including renting motor vehicles. The impact of GST on vehicle hire charges is enormous for businesses and individuals, especially because it comes under RCM. In this article, we will discuss the complexity of GST on vehicle hire charges in detail including RCM applicability and its impact on business as well as rules to be followed.

What is Reverse Charge Mechanism (RCM)?

Normally, the person or entities who supply goods & services are to pay GST. If certain conditions as defined by the government are satisfied, then GST has to be paid on a reverse charge basis i.e. the recipient of supplies will pay the tax instead of the supplier paying it. This is known as the Reverse Charge Mechanism (RCM). RCM shifts the tax liability from supplier to recipient, generally in cases where the supplier is unregistered or when the payer avails service which is specifically notified under RCM.

GST on Vehicle Hire Charges

GST on motor rental expenses has advanced following the presentation of GST. Since the RCM has significant implications on how services are provided — specifically in categories like vehicle rentals etc., there have been several notifications introduced by the Government to ensure a simple process.

The base keyword i.e. GST on vehicle hire charges means the tax imposed when hiring cars custom-built for carrying passengers etc. The service will include cars, buses or other passenger vehicles tied up with businesses for transportation needs, especially employee transport.

As per the GST model, renting motor vehicles is a service and comes under certain regulations which we will discuss in detail below.

Applicability of RCM on Car Hire Charges

There are certain conditions under which the Reverse Charge Mechanism applies to vehicle hire services.

Via notification No. 22/2019-Central Tax(Rate), dated September 30, the government announced that RCM will be applicable on Car hire charges by renting out motor vehicles.

This notification is for services supplied by a non-body corporation to any body-corporate, comprising of renting motor vehicles without the availability of input tax credit (ITC) and chargeable at 5% GST.

Key Points of RCM Applicability:

1. Supplier – non-body corporate like a Partnership Firm or an individual.

2. Recipient – body corporate like Private Limited Company or Public Limited Company.

3. Service provider levies GST at 5% without taking full ITC.

It is provided above to evade small service providers who may not have been a sizable security maker to continue to place the liability on the recipient, as such they might not have enough monetary liquidity.

Situations where RCM will be applicable on the renting of motor vehicles

S. No.	Service Provider	Service Receiver	Applicable Rate	RCM Applicability
1	ABC Travels (GST-registered)	XYZ Ltd. (Corporate entity)	5%	Yes
2	ABC Travels (GST-registered)	Non-corporate recipients	Full ITC: 12%	No
			Limited ITC: 5%
3	ABC Ltd. (Corporate provider)	XYZ Ltd. (Corporate entity)		Not applicable (as supplier is corporate)
4	ABC Ltd. (Corporate provider)	ABC Travels (GST-registered)	Full ITC: 12%	Not applicable (as supplier is corporate)
			Limited ITC: 5%
5	ABC Travels (non-GST compliant)	XYZ Ltd. (Corporate entity)	–	Yes
6	ABC Travels (non-GST compliant)	Non-corporate recipients	–	No
7	ABC Travels (GST-registered; fuel cost excluded)	XYZ Ltd. (Corporate entity)	Full ITC: 12%	No
			Limited ITC: 5%

SAC Code for Renting of Motor Vehicles under GST

Supply of motor vehicles on rental for the renting in this case falls under Service Accounting Code (SAC) 9966.

The rental of a motor vehicle for the carriage of passengers is also encompassed in this code. As Per SAC 9966 GST Is leviable on services providing vehicles with or without a driver for rent.

The service includes the definition of schedules, routes and other operational details by the renter.

Under this SAC, the following two types of tax rates shall apply.

5% GST with restricted ITC: The service provider can only save credit on the input services that are from its same line of commerce.
12% GST with full ITC: The service provider will charge 12% tax and can fully claim the input services.

If all the above-mentioned conditions are satisfied, then in the case of RCM too, the person receiving the service is required to pay GST at the prescribed rate generally 5% without ITC.

Renting of Motor Vehicles vs. Passenger Transport Services

But caution should be exercised in distinguishing the hiring of vehicles for rent and passenger transport services. Passenger transport services under GST cover SAC 9964 and involve the pre-arranged carriage of passengers near predetermined routes & schedules. Conversely, GST on hiring of vehicles generally applies if a vehicle is provided by way of rent for 30 days or more and the hirer has effective control over where it goes and when.

Whereas passenger transport services are not usually covered under RCM, renting motor vehicles under GST falls within RCM or otherwise depending on the agreement between service provider and recipient.

Impact on Businesses

RCM removes the cash flow impact of GST on vehicle hire charges and can have dramatic implications for both providers (most notably body corporates) providing supplies to these customers, as well as taxpayers that are consumers from a non-body corporation. These are some of the implications:

Increased Compliance: The businesses should also make sure that they are aware of their compliance under RCM and be paying appropriate GST on time. They also have to comply with the GST on their returns.
Cash Flow Management: The recipient is liable to pay GST under RCM which can affect the cash flow, especially for companies that often avail rental services.
ITC Restrictions: No ITC can be claimed by businesses availing vehicle hire services at a 5% GST rate under the reverse charge mechanism (RCM), except where the service is provided to an employee in the same line of business. For companies, and especially those that are unable to offset the tax paid at all — a direct hit to earnings.

Recent Amendments and Notifications

GST on hiring of vehicles has been brought under RCM now, with recent amendments and this blog is an attempt to clarify the amendment which we consider in a nutshell. Notification No. 29/2019-Central Tax (Rate) states that only passenger vehicles fall under the RCM framework

This implies, that vehicles such as trucks, cranes or other utility vehicles are outside the scope of this method & tax obligation is still with the supplier.

For eg, Circular No. 177/09/2022-TRU dated August 3, 2022, was issued to clarify the differences between passenger transport and vehicle rental services to make sure businesses apply their corect and liable tax rates.

Conclusion

Businesses in India need to comprehend the nuances of GST on vehicle hire charges. The introduction of RCM as well as meticulous distinction between passenger transport services and rental of a vehicle is needed. Partner with us to stay updated on the latest notifications and compliance requirements for your business to manage its tax liabilities well, translating into healthy functioning while avoiding penalties.

As per the Company Act 2013, they should be updated with the latest GST Law as companies frequently need to hire such vehicles for providing service or moving goods. Right from RCM on car hire charges or renting of motor vehicles under GST, the businesses need to stay proactive in understanding the tax framework and know-how can they optimize their operations not bearing an unnecessary cost.

Tax compliance can be difficult, but you can always make it easy for you and your business with Swipe, a GST billing platform that saves you from all the taxation hassles.

FAQs

1. What is Reverse Charge Mechanism (RCM) in GST?

RCM is a mechanism where the recipient of goods or services is liable to pay GST instead of the supplier, typically for specific services or when the supplier is unregistered.‍

2. When does RCM apply to vehicle hire charges?

RCM applies when a non-body corporate provides vehicle hire services to a body corporate and charges 5% GST without full ITC.‍

3. What is the GST rate on vehicle hire charges under RCM?

The GST rate under RCM for vehicle hire charges is 5% without full ITC. Alternatively, a 12% rate applies with full ITC, but it does not trigger RCM.

4. Can input tax credit (ITC) be claimed on GST paid under RCM for vehicle hire?

ITC cannot be claimed if the GST rate is 5% under RCM, but it can be claimed if the supplier charges 12% GST with full ITC.

5. What type of vehicles falls under RCM for vehicle hire charges?

RCM applies only to passenger vehicles hired for transporting people, not to trucks, cranes, or utility vehicles.

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