Service tax under reverse charge mechanism on renting of motor vehicle designed to carry passengers

As per provision in the Finance Act, the service tax shall be paid by service provider. However, as per provision of section 68(2) of the act, service tax shall also be paid by the recipient of the service. The notification no. 30/2012 dated 20.06.2012, notifies the person and the extent of service tax payable by such person other than the service provider. List of services payable under reverse charge is enumerated in the said notification. Of all the services listed in the said notification, I would like to discuss in this article about the service tax liability in case of renting of motor vehicle designed to carry passengers.

The extent of service tax in case of renting of any motor vehicle designed to carry passengers is depend on whether the provider of service has availed abatement or not. The condition to avail abatement is provided vide notification 26/2012 dated 20^th June, 2012. The condition for abatement as amended recently is depicted from the notification as below:

(i) CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004;

(ii) CENVAT credit on input service of renting of motor cab has been taken under the provisions of the CENVAT Credit Rules, 2004, in the following manner:

(a) Full CENVAT credit of such input service received from a person who is paying service tax on forty percent of the value; or

(b) Up to forty percent CENVAT credit of such input service received from a person who is paying service tax on full value;

(iii) CENVAT credit on input services other than those specified in (ii) above, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

On fulfilling the conditions laid down as above in the said notification the service tax payable shall be restricted to 40% of the liability only.

The proportion of the liability of 40% payable by provider of the service is NIL and the recipient of the service shall pay 100% of the service tax. The 100% of service tax here would mean that only 40% of the service tax shall be paid by the recipient of the service as per notification no.30/2012.

If the above mentioned conditions as laid down in the notification are not satisfied then the liability shall be 100% of service tax. In such case the service tax payable shall be paid equally by the service provider and the service recipient.

From the above discussion, it is clear that if the value of service is abated then the liability of service recipient under reverse charge would be only 40% and the liability of provider of service to pay service tax is NIL. And if the value is non-abated then the liability of paying service tax by service recipient and service provider is 50% each. It means if the service provider avails abatement it is beneficial for both the service provider and service receiver. However, the service provider shall have to mention on the face of the invoice that he has availed abatement which would help both service provider and service recipient to support their stand during audit.

Regards
K.K Singh