GST RCM shifts tax liability to corporate recipients for vehicle rentals at 5%, aiding small suppliers by improving liquidity.
Under the Reverse Charge Mechanism (RCM) for renting of motor vehicles, when a non-body-corporate supplier rents a vehicle to a body corporate and charges 5%, the recipient (the body corporate) pays the GST instead of the supplier. This guide explains who pays, the conditions and the applicable rate.
The implementation of the Reverse Charge Mechanism (RCM) for vehicle rental services has benefited small service providers by enhancing their liquidity. This mechanism alleviated the burden of paying Goods and Services Tax (GST) under the forward charge system, which was challenging for these businesses due to delayed payment receipts for their services, impacting their GST compliance obligations. During the 37th GST Council Meeting, a decision was made to apply RCM to the supply of motor vehicle rental services when suppliers charge GST at 5% to corporate entities. However, RCM was specifically excluded for suppliers who charge GST at 12% with the provision for full Input Tax Credit (ITC), as applying RCM in such cases would have disrupted the ITC flow. Consequently, the government’s reverse charge framework facilitated quicker tax collection and diminished the tax payment and compliance responsibilities for smaller service providers.
Definition and Explanation of ‘Motor Vehicle’ and ‘Renting of Motor Vehicle’ under GST
The terms ‘motor vehicle’ and ‘renting of a motor vehicle’ are not explicitly defined within GST law. However, according to the Motor Vehicles Act, 1988, a motor vehicle refers to
Frequently Asked Questions
When does RCM apply on renting of motor vehicles?
When a supplier other than a body corporate rents a vehicle (with fuel cost included) to a body corporate and charges 5% GST.
Who pays GST under RCM on vehicle rental?
The recipient body corporate pays the 5% GST directly to the government.
What is the GST rate under this RCM?
5%, under which the supplier cannot claim ITC on the vehicle.
Does RCM apply if the supplier charges 12%?
No. If the supplier opts to charge 12% under forward charge with ITC, RCM does not apply.
