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GST Impact on Leasing Business


With India being such a big nation having second largest population, car leasing business has been on continuous surge. Car leasing means when the possession of car is given to the lessee in exchange of monthly lease renal for a certain period of time. At the end of the lease agreement the lessee has the option to either buy that car or return that car back to the lessor. In all the conditions there was some service element which was charged to service tax.

As per notification no: 26/2012 it was provided that the financial leasing will be charged at 10% of the value of the hire purchase/lease rentals. There is an abatement of 90%. The concept of abatement had arisen due to the bundled contract where the goods and services both were provided simultaneously. It was worked out that out of the total lease amount 10% shall be the service charges component by the lesser and hence chargeable to service tax.

Now under GST there is no distinction between the goods and services for levy of tax, there arises no question of abatement.  The goods and services as defined by their respective sections do not include “money”, therefore the interest component shall not be chargeable to GST. Also it is true that as per section 16, Input tax credit shall be available only in case where the input is used in the course or furtherance of business. In such a  scenario, only B2B cases i.e. where both assesses are registered under GST, input tax credit of GST paid on the car shall be allowed provided it fulfills the conditions mentioned in section 16(9) of the Act. No input tax credit shall be available to the end-consumer for GST paid on the car purchased by him.

Looking at the above discussion let us understand this by way of an example.

In B2C: Mr. A buys a Maruti Car worth Rs. 5 lakhs on which GST is charged at the rate of 18%. He gets the car leased from Bajaj Finance for the period of 5 years.

Maruti shall charge GST on the full amount of Car i.e 5lakhs + 18% which works out to Rs. 5.90 lakhs. This amount is financed by Bajaj Finance with lease payment of Rs. 12,000 p.m.  For 5 years. Now Bajaj Finance shall work out the interest component charged in this lease and hence exclude the same for the purposes of GST. Now under GST, Bajaj Finance has to bifurcate as to what charges are being recovered on account of principal and their services charges. Only the service charges component shall be charged to GST. Once GST has been paid at the time of purchase of Car from Maruti, the leasing company cannot recover GST again on the same value.

In B2B: M/s. ABC Limited buys a Maruti Car worth Rs. 5 lakhs on which GST is charged at the rate of 18%. He gets the car leased from Bajaj Finance for the period of 5 years. Assuming that M/s ABC Limited is eligible to claim Input Tax Credit on car u/s 16(9), what shall be the tax implications?

The answer will remain the same but the only difference would lie that M/s ABC Ltd. shall not get the ITC of the taxes paid to Maruti against the GST liability on service charged by Bajaj Finance. The reason for this is that the Service charges which are being paid are not used in the course or furtherance of business. The service charges are being paid for the finance of the car and not for the output of the concern.  Even if ITC is denied the business concern on the other Hand shall be eligible to avail depreciation on the full value of car including GST paid by them.  

In both the circumstances i.e. B2B and B2C the ITC of GST paid shall not be eligible because of different reasons respectively.

Earlier under B2B transaction the assessee used to claim the ITC of excise paid on the car against the service tax liability of the financer provided the depreciation on the same was not claimed. Under GST since the services charges are not used in the course or furtherance of business, no ITC shall be available. This might prove to be additional cost for the taxpayers.  

by:
Keshav R Garg
(B.Com, FCA, CS, ISA (ICAI))
Faculty for GST: Indirect Tax Committee of ICAI
Author: Bharat's GST Ready Reckoner
            A Handbook on GST
Adviser for GST: Industries Association of Chandigarh 
Member: Indirect Tax Committee of CII, PHDCCI, MyGst.MyTax Foundation
Address: 3328, Sector 27 D, Chandigarh, India - 160 019
Phones: +91-172-461-3328, +91-98880-90008

Mails: mygst.mytax@gmail.com, keshavgarg@kdai.in   

Comments

  1. Unknown20 March 2017 at 19:08

    Will it mean that I should go ahead to lease car or wait for GST implementation. I am planning to buy Ertiga

    ReplyDelete
  2. Unknown20 March 2017 at 19:09

    Also what will happen if we buy car now and currently the car purchase is not covered in GST and during payment of lease rentals GST kicks in...

    ReplyDelete
  3. Jewelry lover8 April 2017 at 05:17

    Hi I have recorded all my information so far in money out in the wrong year. Is it possible to change the year or do I have to redo all my work?
    For More Details Please Visit – http://www.eserviceshelp.in/

    ReplyDelete

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