By Abhirup Ghosh, (firstname.lastname@example.org)
On the headway to GST, which is going to be introduced from 1st July, 2017, the Government of India is doing substantial amount of law making each day. In the past few days the Government has not only finalised the rules but has also notified the final rates for goods and services.
The finalised rates are to some extent different from the draft list of rates which was earlier provided by the Council and this is likely to create an impact on the leasing business in the country, let us understand how.
The draft list of rates provided for three items concerning leasing and they were:
- Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration (supply of service) to attract the same GST rate and compensation cess as applicable on supply of similar goods which involves any transfer of title in goods (supply of goods).
- Any transfer of right in goods or of undivided share in goods without the transfer of title thereof (supply of services) to attract the same GST rate and compensation cess as applicable on supply of similar goods which involves any transfer of title in goods (supply of goods).
- Supply consisting of transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed (supply of goods): value of leasing services shall be included in the value of goods supplied.
However, in the final notification of rates, only the first two have been retained and the last one has been removed and the reason is very simple. The last item dealt with supply of goods, therefore, that should not have featured in the list of rate for services.
The rates relating to transfer of right to use or transfer of any right in goods, remains the same as what was proposed in the draft notification, that is, each of these will attract the same rate of GST and compensation cess as is applicable on supply of the similar goods.
Say for example, some motor cars carry attract GST at the rate of 28% and over and above that compensation cess at the rate of 15% is applicable. If there is a transfer of right to use of such motor cars, it will carry GST at the same rate and compensation cess as is applicable on supply of such motor car, which involved transfer of title. Therefore, the effective rate of GST on transfer of right to use the said motor car would be 43%.
Further the chapter heading to the description of service says that – “leasing or rental services with or without operator” which signifies that whether there is a lease of goods with or without the operator, the same rate of tax as applicable on the transfer of title in goods will be applicable.
Earlier there was a confusion regarding the treatment of wet leases of the assets. In a wet lease, though the right to use an asset is provided to the lessee, the control of the asset is retained by the lessor, which is achieved typically by way of appointing an operator. The language of the draft notification of rates on services issued by the Council talked about transfer of right to use and not provision of right to use, so there was a confusion in this regard as transfer of right to use would have attracted GST at the same rate as would have been applicable on supply of the goods, in question, whereas, provision of right to use would have attracted GST at the rate of 18%.
But the final notification of rates on services has cleared this confusion. Entry no 17 uses the words leasing or rental services with or without operator – this would cover wet leases as well. Therefore, henceforth, lease of assets will attract the rate applicable to the goods in question, irrespective of whether it is transferred with or without the operator. However, there is a new confusion now, the entry states that the applicable rate in case of lease transactions shall be – Same rate of central tax as on supply of like goods involving transfer of title in goods. The language of the law, however, does not cover compensation cess. Therefore, there is an ambiguity on whether compensation cess, as applicable to the goods, will be applicable on the lease of assets as well. We hope, there will be clarification from the Council in this regard in times to come.
We have also compiled the applicable rate of GST on supply of various leasable assets which can be accessed at – http://vinodkothari.com/blog/gst-rates-on-leased-assets/
For an in-depth discussion of how this issue might affect your business please write to us at email@example.com