This circular provides clarification on the applicability of Reverse Charge Mechanism (RCM) on services of renting of motor vehicles designed to carry passengers, where the cost of fuel is included in the consideration.

Suppliers providing such renting services have an option to pay GST at either 5% with limited input tax credit or 12% with full input tax credit. Based on the recommendation of the GST Council in its 37th meeting, it was decided that RCM would apply only when such services are provided by suppliers paying GST at 5% to body corporates. Services taxed at 12% with full ITC were kept outside RCM to avoid blocking of the credit chain.

After the insertion of the relevant entry in the RCM notification effective from 1 October 2019, doubts arose due to drafting, as under RCM the supplier does not charge GST, while the notification referred to suppliers “paying tax at 2.5%”. The circular clarifies that where the supplier charges GST at 12%, RCM does not apply and the supplier remains liable to pay tax. However, where the supplier does not charge GST at 12%, the liability to pay GST shifts to the recipient under RCM.

To remove ambiguity, the notification was amended on 31 December 2019 to clearly specify that RCM applies only when the supplier is not a body corporate, does not charge GST at 12%, and supplies the service to a body corporate. This amendment is clarificatory and applies retrospectively from 1 October 2019 to 31 December 2019 as well.