Companies spend a lot on local and inter-state traveling by hiring motor vehicles to attend business meetings, conferences, etc. Further, manufacturing companies are generally located at remote locations and provide transport facilities to their employees. In this article, we discuss the GST Implications on Renting of Motor Vehicles for the Transportation of Employees.
Services provided by Buses, Mini Buses, Van, Cabs, Auto-rickshaw are chargeable to GST. However, there is confusion among industries concerning:
- Input Tax Credit (ITC) of GST, if it can be availed or not.
- When the supplier doesn’t charge GST on its invoice:
- whether the recipient has to charge GST on a Reverse charge basis.
- Further, do they have a right to claim to ITC on the same?
Firstly, let us understand the key concepts.
What Is Forward Charge Mechanism?
- In GST, the seller collects GST from Buyer and remits it to the government.
- The seller remits the amount after deducting GST paid by him on his own purchases (subject to other provisions).
- This is known as forward charge, wherein the seller pays the GST amount to govt.
What Is Reverse Charge Mechanism (RCM)?
- In some cases, GST on a particular transaction is paid by Buyer himself to the government.
- In such a case, the seller will raise the invoice without levying GST and Buyer will pay GST on the same directly to the government.
- This is known as Reverse charge mechanism (RCM).
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The service, “Renting of Motor Vehicle, designed to carry passengers,” falls under the Forward charge mechanism and Reverse charge mechanism.
Now let us take a look at the following situations:
- When should the supplier of motor vehicles charge GST under forward charge?
- When is the recipient of service liable to charge GST on an RCM basis?
Case 1: Services of Renting Motor Vehicle covered under RCM:
RCM is applicable in the following case:
- Services are provided by renting any motor vehicle designed to carry passengers.
- Here, the cost of fuel is included in the consideration charged from the service recipient.
- Any person.
- An exception to the above is a body corporate who supplies the service to a body corporate. Also, he does not issue an invoice charging GST at 12% to the service recipient.
- A body corporate located in the taxable territory.
Here is an example to help us understand RCM better.
- Tata Steel Ltd (Body Corporate) enter into a contract with Heena Tours & Travels (Proprietorship concern).
- They take the services of renting motor vehicles for its employees. Here, GST at 12% is not charged by Heena tours and travels.
- Then, Tata Steel Ltd will be liable to pay GST @ 5% on a reverse charge basis.
Related Read: Implications Of GST On Warranty On Sales
Case 2: Services of Renting Motor Vehicle covered under Forward Charge Mechanism:
Apart from the above cases covered in RCM, all other cases shall be covered under forward charge.
It implies that the supplier should charge GST under forward charge.
Further, even if the service supplier is not registered under GST law and doesn’t charge GST on its invoice, then the recipient of service will not be liable to pay GST on RCM basis in the following cases:
- where Cost of fuel is not included in consideration
- where Service Provider is a Body Corporate & registered under GST.
- where Service Recipient is Other than Body Corporate
- where Service Recipient is Body Corporate located in Non-taxable territory.
Related Read: GST On E-Commerce Business Models: A Quick Guide
Now we move on to discuss the availability of Input tax credit (ITC).
ITC will be available to the recipient of service subject to certain conditions.
With the introduction of new provisions with effect from 01/02/2019, ITC on renting, leasing, and hiring motor vehicles has been disallowed only for vehicles having capacity up to 13 seats (including driver) subject to 2 exceptions.
These exceptions are as follows:
- Case 1:-
- The Vehicle has an approved seating capacity of more than 13 persons (including driver),
- The service of leasing, renting or hiring is used for business
- The service provider furnishes invoice as prescribed,
- And all other conditions are complied with as per law.
- Case 2:-
- The Vehicle has an approved seating capacity of upto 13 persons (including driver),
- An employer must provide the same to its employee under any law for the time being in force,
- The service of leasing, renting, or hiring is used for business.
- The service provider furnishes invoice as per Section 31 and Rule 46,
- And all other conditions are complied with as per law.
Why Choose Incorp?
We provide comprehensive advice and assistance on various indirect tax levies including Goods and Services Tax (GST) and Customs Duty. Our experts can help you with the following:
- Assisting entities to charge GST under forward charge or reverse charge correctly.
- Assisting entities to avail correct Input Tax Credit (ITC) in regular return filing
- Assist in solving any problems faced by the entities during assessment proceedings
Frequently Asked Questions
- other than a body corporate;
- does not issue an invoice charging GST @12% (6% CGST + 6% SGST) from the service recipient; and
- supplies the service to a body corporate located in the taxable territory; Then Body Corporate has to charge GST on an RCM basis.
- The transaction between the company & their employees is due to the “Employer-Employee” relation. As per law, services by an employee to the employer in the course of or in relation to his employment shall be treated neither as a supply of goods nor a supply of services.
- Hence, GST is not applicable on the nominal amounts recovered by employers from their employees in the subject case.
In GST, the seller collects GST from Buyer and remits it to the government. The seller remits the amount after deducting GST paid by him on his own purchases (subject to other provisions). This is known as forward charge, wherein the seller pays the GST amount to govt.
In some cases, GST on a particular transaction is paid by Buyer himself to the government. In such a case, the seller will raise the invoice without levying GST and Buyer will pay GST on the same directly to the government. This is known as Reverse charge mechanism (RCM).