As the county moves to GST, we are offering extensive research, trainings, workshops and services to help our clients transition to the new regime.

We anticipate clients in the financial services industry to expect a bouquet of services to enable a smooth transition to the GST. Some of the services we are providing are:

-Impact study of GST:  includes studying implications of GST on organizational cash flows
-Assisting in identifying the different benefits that can be availed by the company
-Preparation of detailed checklists for GST administration
-Organizing intermediate and advanced training programs for groups of employees based on specific organizational needs
-Reviewing the existing documentation to ensure that they are aligned with the law

Write to us at gst@vinodkothari.com if you wish to know further details with respect to the above.

For our workshops and training click here

Please drop an email to events@vinodkothari.com to register your interest.

Major rejig in the GST law with respect to car leasing/ renting business

GST Division, (gst@vinodkothari.com)

Introduction

Vehicle leasing business in India has been gaining popularity ever since its inception in the year 2005. In the past few years, the industry has picked up pace and become the preferred mode of procuring a vehicle given its temporary and simplistic structure. The vehicle leasing market in India is estimated to be worth around Rs. 1500 crores, with a Compounded Annual Growth Rate (CAGR) of about 15-20%.[1] Although the market is scattered in nature, with around 30 companies in India carrying out the business of vehicle leasing, companies such as LeasePlan, Tranzlease, Orix India are some of the established players in this market. With a high percentage of working age population of around 925 million by 2020, and 70% of compact car owners belonging to an age group of below 35 years, the Indian vehicle leasing market has the potential to double its value in the coming 3 to 5 years.[2] While the core business of leasing companies in India involves leasing to corporations who provide the vehicles to their employees, the booming cab sector is also another area forms a chunk of their portfolio.

GST- A roadblock or a bump?

The word lease, rent or hire are often interchangeably used to mean acquisition of right to use for a very short span of time to several years. However, there is a thin line of difference between these terms. The right to use an asset can take place in several ways which forms the basis of determining its applicability. Although renting and leasing of vehicle is similar in the sense that both result in transfer of right to use the asset, that’s where the similarity ends as well.

From GST perspective it is important to understand the differences between each of these. The definition of “rent-a-cab” service is not specified in GST however the same was provided in the erstwhile service tax regime. The relevant extract of section 65 of the Finance Act, 1994 is reproduced below:

 (105)(o) – ‘taxable service’ means any service provided or to be provided “to any person, by a ‘rent-a-cab scheme operator’ in relation to the renting of a cab.”

65(91) – “rent-a-cab scheme operator means any person engaged in the business of renting of cabs.”

65(20) – “Cab means –(i) a motorcab, or (ii) a maxicab, or (iii) any motor vehicle constructed or adapted to carry more than twelve passengers, excluding the driver, for hire or reward”

The service tax laws prescribed applicability of tax on the services provided by the operators under a rent-a-cab scheme in relation to renting of cab. The word ‘rent’ or ‘hire’ in colloquial language means acquiring right to use for a short span of time ranging from few hours to few days. For instance, if you book a taxi you say that you have hired a taxi. Likewise, you rent a car if you have to travel inter cities in India, but the common place jargon used does not indicate leasing of a car for a day. Therefore, where the law does not provide for specific meaning to terms, the meanings are derived from usage of such words in our daily lives.

The word had always been taken into litigations and there are several court rulings and judgments to understand its extended impact.

The activity of renting, hiring, leasing, licensing would attract that rate of GST, depending upon their nature involving “transfer of right to use” as per facts and circumstances of each transaction and based on judicial precedents.

The Supreme Court decision in State of Andhra Pradesh v/s RashtriyaIspat NigamLtd, 2002[3]  made it all pervasive that the transfer of right to use goods involves transfer of possession and effective control, but mere transfer of custody would not tantamount to transfer of right to use.

Also, Supreme Court in Bharat Sanchar Nigam Limited versus UOI (2006)[4] had mentioned certain distinguishable criteria which would form a basis of identifying transfer of right to use in a transaction. Some of the criteria so stated by the learned judge were related to identity of goods, legal right to use goods and not license to use goods.

To begin with, renting can be identified in two dimensions i.e.

  • When motor vehicle is made available to use by the recipient and the control and possession is retained by the owner; and
  • When control and possession is transferred to the recipient.

The first situation can be best identified with mere hiring where the exclusive right on the vehicle retains with the owner and it’s more like transportation of passenger. Further, Uttarakhand High Court in Commissioner of Customs and Central Excise Vs Sachin Malhotra, Raj Kumar Taneja, and M/s Shiva Travels [2014][5]had laid down the difference between a mere hiring and renting for rent-a-cab scheme services. The prevalent difference that is noticed is that renting involves transfer of the control and possession of the vehicle and the hirer is endowed with the freedom to take the vehicle wherever he desires with the obligation to keep the owner informed of his movements from time to time, however “hiring” involves retaining the control of the vehicle. Service tax under rent-a-cab scheme would be levied only when there is case of renting and not hiring.

Also in RS Travels vs Commissioner of Central Excise[6]it was held that when the car is provided on kilometer basis to the client and control of the vehicle remains with the cab operator/driver, he is providing transport service and this activity would be outside the purview of the entry “rent a cab operator’s service”

Therefore, such services would also fall outside the scope of renting in GST regime and would be covered under transport services.

Now, it is actually the second situation which differentiates the classification head put forth by the GST Council. In Express Tours and Travel Pvt Ltd vs Commissioner of Central Excise[7], it was held that by the tribunal that not much of a difference is there between the words Hire & Rent in the context in which they are used. The Rent-a-Cab Scheme[8] would have consistently used the word ‘Rent’. Therefore, rental services are almost short term and can be on per hour or per day or per month basis, with a cap on the total run of the vehicle during the period of renting. It is read in terms with the scheme mentioned in Motor Vehicles Act. Section 3 of the above scheme states that “no person shall engage himself in the business of renting a motor cab under this scheme without licence”; therefore, one must compulsorily register itself for providing renting services. Having “yellow plated” cars forms a symbol of its registration.

On the other hand, leases are often viewed as having a longer time period than normal renting of asset. Although leasing does not result in transfer of title to the lessee, an option to buy the asset at the end of lease term is available to him. Thus, the intent behind leasing remains that of owning the asset and therefore, the rate assigned remains that of the leased asset itself dictating that acquiring the vehicle on lease is no different from owning the vehicle. Further, when the vehicle is provided in such a manner that it qualifies as a taxable supply, the supplier is eligible to claim Input Tax Credit (ITC) on the supply as well. In cases of the employer providing his employees with the vehicle, he is eligible to claim ITC on the same provided he charges the employee for such a service (or deducts the same from his compensation as consideration for providing the rights to use the vehicle). The introduction of GST was expected to consolidate the vehicle leasing market in India and add fuel to the roaring Vehicle leasing sector, but instead, the cumulative effective rate of 43% (in most cases), comprising 28% GST and 15% Compensation Cess left the industry shell-shocked as it was a steep climb from the 13.5%-14.5% VAT rate prevalent in the old structure of taxation. The unexpected climb in the tax rate jolted the entire leasing sector, with stalwarts such as LeasePlan and Tranzlease reporting a sudden spurt in foreclosure requests.[9]

A graphic by LeasePlan highlighted the rise in monthly lease rental by comparing the tax applicable in the old and the new regime-

Vehicle Ex-Showroom(INR) Monthly Lease Rental with VAT @ 14.5% (In INR) Tax Rate (GST + Cess) Monthly Lease Rental with GST (In INR) Differential Monthly Lease Rental (In INR)
7,51,000 18,970 28% + 15% 23,690 4,720
8,35,600 21,880 28% + 1% 24,650 2,770
8,09,400 15,940 28% + 3% 18,240 2,300

Source: LeasePlan[10]

Such an indiscriminatory rise left the leasing companies reeling under pain, with the costs associated with leasing expected to go up by 10-25%. This led to a representation of established players appearing before the GST council pleading for a reduction in tax in order for the businesses to survive.[11]

Abatement in rates

The Ministry of Finance, vide a notification dated 13th October, 2017[12], answered the pleas of the leasing companies and announced an abatement in rates associated with leasing of vehicles. The aforesaid notification comes in effect from the date of notification and will remain applicable for 3 years, until 1st July, 2020. The aforesaid notification introduces an abatement of 35% on the applicable rate of tax, i.e., only 65% of the applicable rate of GST will applied on the taxable value. However, the reduction has been only on the rate of tax and not on the applicable rate of Compensation Cess. However, the abatement provided is subject to the following conditions:

Condition No. Condition
1. The Motor Vehicles was purchased by the lesser prior to 1st July, 2017 and supplied on lease before 1st July, 2017
2.          i.            The supplier of Motor Vehicle is a registered person.

ii.            Such supplier had purchased the Motor Vehicle prior to 1st July, 2017 and has not availed input tax credit of central excise duty, Value Added Tax or any other taxes paid on such vehicles

Each of the conditions are mutually exclusive, which means the abatement can be availed if either of the two are complied with.

The conditions imposed by the MoF are somewhat complex and require further elaboration which has been done below in cases when the supplier is a registered person-

  Acquired on Leased out on Rate applicable
Case 1- ITC availed Before 1st July, 2017 Before 1st July,2017 65% of 28%+15%=33.2%
Case 2- ITC availed Before 1st July, 2017 After 1st July, 2017 28%+15%=43%; No change
Case 3- ITC availed After 1st July, 2017 After 1st July, 2017 28%+15%=43%; No change
Case 4- ITC not availed Before 1st July, 2017 After 1st July, 2017 65% of 28%+15%=33.2%
Case 5- ITC not availed After 1st July, 2017 After 1st July, 2017 28%+15%=43%; No change
Case 6- ITC not availed Before 1st July, 2017 Before 1st July,2017 65% of 28%+15%=33.2%

The notification comes as a huge sigh of relief to leasing companies, saving them from incurring huge losses on existing lease contracts. This addresses the major issue of tax mismatch for the leasing companies.

Change with respect to the renting of cars

Another change that was effected through a separate notification[13], issued on the same date as the earlier one, was with respect to renting of cars. The notification has amended entry 10(i) of notification number 11/2017-Central Tax (Rate)[14] to change the language in the following manner:

Earlier notification Current notification
Renting of motorcab where the cost of fuel is included in the consideration charged from the service recipient. Renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient.

This has opened the scope of renting business. Earlier, renting of cars would have meant renting of motor cabs, which required the cars to be registered under the Motor Cab Scheme and the required the number plates to be coloured in yellow. But now the GST law permits renting of motor vehicles and the same attracts a significantly lower rate than that applicable to leasing of motor vehicles[15]. Currently, the rate of the tax on renting of motor vehicles is 12% (where ITC is claimed for inputs) as against the rate of tax on lease of motor vehicles, which in most of the cases is as high as 43%. Renting of motor vehicles do not require separate registration under the Motor Cab Scheme, it is only when the vehicle and the usage of the same meets the definition of Motor Cab, the requirement of registration arises. Therefore, now the leasing companies can explore this as a new product for their clients.

This product will be much cheaper in the hands of the customers, this is evident from the illustration below:

Cost of Car  ₹  10,00,000.00
IRR 14%
Tenure 36 months
Expected residual value 20%
GST in case of lease 43%
GST in case of renting of car 12%
EMI (excluding tax)  ₹        29,675.44
EMI (in case of lease, incl taxes)  ₹        42,435.88
EMI (in case of renting, incl taxes)  ₹        33,236.49
Difference in EMI  ₹          9,199.39

Therefore, in likelihood, if this product is structured and presented properly, the same shall be more popular than leasing. Also, it is important to take a note that in this structure, there is a strong probability that the input tax credits accumulated on acquisition of the assets will be much higher than the tax liability, because the inputs, being motor vehicles, will carry high rate of tax and outputs will carry low rate of tax. This is called the inverted model. In such case, the Lessor shall be able to claim refund of the difference between the tax input and the tax output.

Conclusion

The prayers of the leasing companies have been answered and the abatement in the rates is a step in the right direction. The leasing companies faced a major crisis with respect to the existing vehicles given on lease, as the tax paid on acquisition of vehicles was much lower than the tax charged on the lease rentals. This lead to a major mismatch leading several companies who acquired cars on lease, to pre-terminate the lease contracts.

Also, the other amendment with respect to renting of motor vehicles has opened up a new school of thoughts as leasing companies can now explore renting of motor vehicle as a new line of business.

[1] http://businessworld.in/article/-India-s-Car-Leasing-Market-Is-Worth-Rs-1-5K-Cr-Poised-For-15-20-CAGR-/27-05-2017-119041/

[2] http://www.ey.com/in/en/newsroom/news-releases/news-indias-auto-finance-market-poised-to-double-its-current-market-size-by-fy20-ey-report

[3]https://indiankanoon.org/doc/1011356/

[4]https://indiankanoon.org/doc/716582/

[5]http://lobis.nic.in/ddir/uhc/KMJ/judgement/20-08-2014/KMJ06082014CEXA32011.pdf

[6]https://indiankanoon.org/doc/1309782/

[7]https://indiankanoon.org/doc/1021502/

[8]http://transport.bih.nic.in/Guidelines/Schemes-Rent-A-Cab-1989.pdf

[9] http://carajput.com/blog/vehicles-will-be-lease-costlier-in-gst.html#.WetTx1tL_IU

[10]https://www.leaseplan.co.in/ReadBinaryItem.asp?DocumentId=///publicnew/documents/modules/news/277894927b336a4ae3a21759665ebc6d/DocAttached/LeasePlanIndiaGSTUpdateJune2017pdf

[11] https://timesofindia.indiatimes.com/business/india-business/gst-to-make-vehicle-lease-costlier/articleshow/59316278.cms

[12] http://www.cbec.gov.in/resources//htdocs-cbec/gst/notfctn-37-CGST-rate-english.pdf

[13] http://cbec.gov.in/resources//htdocs-cbec/gst/notfctn-31-CGST-rate-english.pdf

[14] http://cbec.gov.in/resources//htdocs-cbec/gst/Notification11-CGST.pdf

[15] A list of rates applicable on various services relating to motor vehicles can be viewed here: http://vinodkothari.com/blog/gst-rates-on-services-relating-to-motor-vehicles/

GST and CSR Expenditure

Vallari Dubey

finserv@vinodkothari.com

 

Introduction

Indian companies, especially public and listed companies are actively engaged in Corporate Social Responsibility (“CSR”) activities. Moreover, since the introduction of Companies Act, 2013, the law has mandated compulsory CSR expenditure for a specific class of companies. In the recent months, with the advent of GST, life of corporates has experienced all sorts of challenges in terms of operational flexibility and cost. One such aspect that has not been shed much light on, is the impact of GST on CSR activities and expenditure thereon by the companies. To understand this better, we take a scenario of donating water purifiers as part of a Company’s CSR policy. In this article, we try to detail out the analysis of such scenario by studying the provisions of GST and Companies Act, 2013. Read more

GST Rates on services relating to Motor Vehicles

By GST Division (gst@vinodkothari.com)

The GST rates assigned for transaction in relation to motor vehicle is summarized in the below table:

Read more