An Overview of GST Implications on Lease Transactions
Yuttika Dalmia | finserv@vinodkothari.com
Classification of Lease under GST: Supply of Goods or Services?
Application of Goods-Equivalent GST Rates on Leasing Services
Leasing under GST as Mixed and Composite Supply
Should CGST +SGST or IGST be charged on the supply ?
Introduction
In today’s dynamic business environment, leasing has emerged as a powerful financial strategy, allowing companies to access capital assets without significant upfront capital investment. While traditional forms of funding such as equity and loans serve to inject owned or borrowed capital into a business, leasing offers rented capital which enables operational agility with reduced financial commitment. For businesses aiming to streamline their operations and be future-ready, leasing is the smart way forward.
Under the GST framework, leasing is unequivocally classified as a supply of service, irrespective of whether the lease relates to movable or immovable property. Under accounting parlance, Leasing is classified into two categories: financial lease and operating lease. These classifications are based on the extent to which risks and rewards of ownership are transferred from the lessor to the lessee.
GST implications on leasing are governed by specific provisions relating to nature of supply, place of supply, time of supply, utilization of input tax credit and applicable tax rates. Understanding these is critical for lessors and lessees alike to ensure compliance, proper tax treatment , and optimal input tax credit management.
This note presents an overview of the GST framework applicable to leasing transactions.
Is Lease covered under GST?
If we refer to the definition of ‘supply’ as mentioned under Section 7 – Scope of Supply of the CGST Act, it becomes evident that the concept of ‘supply’ under GST is broad and inclusive, covering a wide range of taxable transactions including leasing.
| Section 7(1) of the CGST Act states: (1) For the purposes of this Act, the expression – “supply” includes- (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; |
Therefore, leasing is explicitly treated as a supply under GST law and shall be charged to tax if there is a consideration and it is in the course of business.Since leasing is taxable under GST, it is important to determine whether it is treated as a supply of goods or services, as this affects the GST rate, place of supply, and input tax credit.
Classification of Lease under GST: Supply of Goods or Services?
The classification of lease transactions under GST is critical to determine the applicable tax treatment , rate, place of supply and input tax credit eligibility. GST does not distinguish between financial lease and operating lease From GST perspective, a lease is a lease, irrespective of the accounting classification.
A lease transaction typically does not, by itself, result in the transfer of title of goods. Therefore, where the transaction involves an automatic transfer of ownership or title in the goods at a future date upon payment of consideration as in the case of hire purchaser condition sale, it shall be treated as goods under GST. Therefore lease transactions where there is transfer of title post fulfillment of certain conditions laid down in the agreement, the same shall be covered under Schedule II Entry1(c) of the CGST Act which sates as follows:
| (c) any 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, is a supply of goods. |
Conversely, if the transaction involves the transfer of right to use goods or any interest without transfer of title either at the inception of the agreement or at any point of time it shall be classified as supply of service in accordance with Schedule II, Entry 1(b) and Entry 5(f) of the CGST Act.Therefore, all types of leases are generally treated as a supply of services under GST, unless specifically covered under exceptions such as hire-purchase arrangements, which involve transfer of ownership and are therefore treated as a supply of goods
The summary is presented to show type of lease and its classification under GST
| Type of Lease | Classification | GST Treatment |
| Operating Lease (no title transfer) | Service | Treated as right to use goods-supply of service under entry 1(b) of Schedule II |
| Financial Lease (substance over form) | Service | Treated as right to use goods-supply of service under entry 1(b) of Schedule II |
| Sale on hire-purchase (with title transfer) | Goods | Treated as supply of goods under clause 1(a), Schedule II |
Leasing is usually treated as a supply of service, unless there is a transfer of title, in which case it is considered a supply of goods. However, in many practical situations, leasing transactions may involve bundled supplies. Therefore, it is important to determine whether the lease qualifies as a composite supply or a mixed supply. It is also essential to examine the applicable rate of tax.
Application of Goods-Equivalent GST Rates on Leasing Services
As per Entry 33 of the Schedule of GST rates for services approved by the GST Council, the supply of services involving the leasing, renting, or transfer of the right to use goods is liable to attract the same rate of GST and compensation cess as applicable to the supply of similar goods involving transfer of title, i.e., a supply of goods. This provision forms the basis for applying goods-equivalent tax rates to leasing transactions, despite their classification as services under GST.
Link to the notification
(https://d23z1tp9il9etb.cloudfront.net/download/gstlaw/NOTIFICATION%20NO.%2011_2017-CENTRAL%20TAX%20(RATE)1724408331.pdf)
Leasing under GST as Mixed and Composite Supply
GST laws have introduced the concepts of mixed supply and composite supply to determine the appropriate tax treatment when two or more goods or services are supplied together. These classifications become particularly significant in leasing transactions, where various components such as goods, services, and accessories may be bundled under a single transaction. Accordingly, leasing transactions may be treated as either a composite supply or a mixed supply, depending on how the components of the lease are structured and offered.
Therefore, understanding the classification between composite and mixed supply in lease transactions is essential to ensure appropriate GST rate application, compliance, and input tax credit treatment.
Composite Supply : Section 2(30) of the CGST Act:
When two or more services are supplied as they are naturally bundled together and supplied in conjunction with each other, with one being the principal supply, it becomes a composite supply. Leasing is considered a composite supply when a) It involves multiple services that are naturally bundled. b) There is a principal supply, with the other supplies being incidental to it. The GST rate applicable on a composite supply shall be the same as the rate applicable to the principal supply. (Section 8(a) CGST Act.)
Let us understand the above with a help of an example:
An electric motor vehicle is being leased out by the lessor, and the vehicle is provided along with the battery installed in it. The electric vehicle is the principal supply and the battery is an integral component of the EV. Therefore the battery and the vehicle are naturally bundled and constitute a composite supply. The entire supply is taxed based on the GST rate applicable to leasing of the electric vehicle.
Mixed Supply: Section 2(74) of the CGST Act
Mixed supply refers to a combination of two or more individual supplies of goods or services, made together for a single price, where each supply can be provided separately and the supplies are not naturally bundled in the ordinary course of business.In such cases, the entire transaction is taxed at the highest rate applicable to any of the constituent supplies, in accordance with Section 8(b) of the CGST Act.
Let us understand this with an example: A Machinery is supplied under a leasing contract, and the contract is bundled with annual maintenance service and insurance for the machinery. These items are not naturally bundled and are not interdependent in a typical leasing contract. Each of them can be supplied independently. Therefore, the supply qualifies as a mixed supply under GST. Consequently, the highest GST rate applicable to any one of the components in the bundle shall apply to the entire transaction, as per Section 8(b) of the CGST Act, 2017.
To clarify the above concepts, let us refer to a flow chart.
Should CGST +SGST or IGST be charged on the supply ?
To determine whether CGST + SGST or IGST should be charged on a supply under GST in India, the place of supply and location of supplier are key factors. The rules for determining whether a supply is inter-State or intra-State arise from Sections 7 and 8 of the IGST Act, and must be read in conjunction with Sections 10 and 12. The rules differ for the supply of goods and services.
Place of Supply of Goods (Section 10 of IGST Act)
Place of Supply of goods is governed by section 10 of IGST Act which lays down specific rules depending on the nature of supply such as whether there is movement of goods or no movement of goods etc. This helps to determine whether a transaction qualifies as an inter-State or intra-State supply, and accordingly, whether IGST or CGST/SGST shall be applicable.
The place of supply of goods under the IGST Act is determined based on the following criteria:
- Movement of goods: If supply involves movement of goods, the place of supply is the location where goods are delivered to the recipient.
- No movement of goods: Where there is no movement of goods, the place of supply is the location of goods at the time of delivery to the recipient.
- Installation at site: If the goods are installed or assembled at site, the place of supply is the place of such installation or assembly.
- Supply on Board a Conveyance: Where the goods are supplied on board a conveyance, such as a ship, aircraft, train, or bus the place of supply is the location where the goods are taken on board the conveyance
Place of Supply of Services (Section 12 of IGST Act)
In the case of services, the place of supply is generally the location of the recipient.The rules for determining the place of supply for services are laid down under section 12 & 13 of IGST Act. However specific rules apply based on the nature of services.In the context of leasing services, the location of the supplier of services is considered to be the fixed establishment from which the leasing service is most directly provided. Unless otherwise specified, it is generally presumed that the place where the sourcing and servicing of the client is done is the supplier’s location.
In practice, identifying this location may be challenging. The following guidelines provide clarity:
Intra State Lease with Inter-State Procurement
The lessor should place the order for goods using the GST number in their own state. If the goods are supplied from another state, this will classify the purchase as an inter-state transaction under Section 10(1)(a) or 10(1)(b) of GST Act. Subsequently when the assets are leased to the lessee within the same state using the lessee’s GST number, the lease becomes local supply subject to CGST and SGST.
Inter State Lease
If the lessor does not have a GST registration in the State where the lessee is located, the lessor places an order using any registered GSTIN. Therefore there will be deemed delivery Under Section 10(1)(b), there is deemed delivery to the lessor. If the lessor and lessee are in different States, the lease is an inter-State supply and IGST is charged.
Movement of Goods by Lessee
After entering into a lease, the lessee moves the goods to another location.This does not affect the taxability of the original lease transaction.The tax is on the right to use the goods, not on the exercise of that right. Any such movement is on the lessee’s account and is not relevant to the lessor.
The place of supply of leasing services is determined based on the supplier’s and recipient’s location and not the physical movement of goods post-supply. The right to use is the taxable element, and post-supply movements by the lessee do not alter the nature of the original transaction.
Since CGST + SGST rates are the same as the IGST rate, and IGST is fully creditable against CGST and SGST liabilities, there is no loss of input tax credit or tax inefficiency due to inter-State transactions. Therefore, leasing can be structured across States without impacting tax efficiency.
Rule to Determine Tax Type in Lease
| Situation | Charge |
| If the location of supplier and place of supply are in the same state | CGST + SGST |
| If location of supplier and place of supply are in different states | IGST |
For example, if the lessor is registered and located in Maharashtra, and enters into a lease transaction with a lessee situated in Karnataka, the supply qualifies as an inter-State supply. Hence, the lessor should charge IGST on the transaction. Accordingly, the lessor shall charge tax as per the place of supply provisions i.e. charge CGST + SGST for lease transactions with lessees located within Maharashtra -intra-State supply, and Charge IGST for lessees located outside Maharashtra-inter-State supply
Summary Table
| Type of Lease | Place of Supply Rule | Tax to Charge |
| Leasing of immovable property | Location of property (Refer Section 12(3) of IGST Act) | Based on property location |
| Leasing of goods eg cars machines | Location of recipient if registered or where handed over if unregistered (Refer Sec 10(1)(c) of the IGST Act. | Depends on supplier & Place of Supply |
Once the applicable type of tax has been ascertained, it becomes imperative to determine the point of taxation, as this defines the precise moment at which the tax liability is incurred. A clear understanding of the point of taxation is therefore vital to ensure timely compliance and accurate reporting within the GST framework. Let us now understand this concept.
Point of Taxation
The point of taxation refers to the time when liability to pay GST arises. Since leasing is treated as a supply of service, the time of supply is determined in accordance with Section 13. Accordingly, GST liability arises at the earlier of:
- The invoice date, or
- The payment date.
In case of supply of services, there is one more concept under the GST law that must be noted. Section 2(33) of the CGST Act provides the meaning of “continuous supply of services”. This concept is significant because the provisions relating to the time of supply differ in the case of continuous supply of services compared to other types of service supplies.
The invoicing requirements for continuous supply of services are also distinct and are governed by Section 31 of the CGST Act. A lease transaction may appropriately fall under the category of “continuous supply of services” as defined in Section 2(33), particularly when the contract involves recurring payment obligations over a period exceeding three months. In such cases, the time of supply is determined based on the due date of payment as specified in the contract, which effectively becomes the date of invoicing for GST purposes.
Input Tax Credit
Input Tax Credit (ITC) under the GST regime enables a registered person to claim credit for the tax paid on purchases of input goods, input services, and capital goods used in the course or furtherance of business. The GST law defines the term “input tax credit” in section 2(63) of the CGST Act as “credit of input tax”. The tax referred here is with respect to tax charged on inputs.
The mechanism of Input Tax Credit is one of the core features of the GST framework, designed to eliminate the cascading effect of taxes. The statutory basis for claiming ITC is provided under Sections 16 to 21 of the CGST Act. Among these, Section 16(1) serves as the enabling provision, stating that every registered person is entitled to claim ITC on inputs that are used or intended to be used in the course or furtherance of business.
In B2B transactions, this mechanism ensures tax efficiency as the recipient is eligible to claim ITC on the GST paid. However, in B2C transactions, the end consumer cannot avail ITC,making the GST paid a final cost and leading to tax inefficiency.
Restrictions and Conditions on ITC
The entitlement to ITC is subject to various conditions and exclusions, as laid out in Section 17 of the CGST Act:
- Section 17(1) Apportionment of credit between business and non-business use,
- Section 17(2) Apportionment between taxable and exempt supplies, and
- Section 17(4) Special provisions for banks & NBFCs
- Section 17(5) Blocked credits in specified cases
Section 17(1) & Section 17(2) of CGST Act:
Section 17(1) of the CGST Act provides that where the inputs or input services are used partly for effecting taxable supplies and partly for non-business purposes or exempt supplies, the portion attributable to non-business or other ineligible purposes shall not be eligible for Input Tax Credit. Only the portion used for taxable supplies in the course or furtherance of business shall be considered for ITC.
Further Section 17(2) of the CGST Act provides that where goods or services or both are used by a registered person partly for effecting taxable supplies, including zero-rated supplies under the CGST Act or the IGST Act, and partly for effecting exempt supplies under the said Acts, the input tax credit shall be restricted to that portion of the input tax which is attributable to the taxable supplies, including zero-rated supplies.
The apportionment of ITC as required under Section 17(1) and Section 17(2) of the CGST Act, is governed by Rules 42 and 43 of the CGST Rules, 2017. These rules provide a detailed mechanism for determining the eligible portion of ITC where inputs or input services are used for both taxable and exempt supplies, or for business and non-business purposes.
Method of Attribution:
- Fully set aside credit exclusively used for taxable supplies
- From the total input tax credit we may deduct the following
- ITC attributable to non business purpose
- ITC which forms part of the block credit as per Section 17(5)
- ITC used for exempt supplies
- The remaining common credit is then apportioned based on the proportion of exempted turnover to the total turnover for that period.
Section 17(4) for banks and financial institutions:
There is a special provision under Section 17(4) of the CGST Act for banks and financial institutions, which states that these classes of registered persons are eligible to claim only 50% of the total ITC, irrespective of whether the inputs are used for providing taxable or non-taxable supplies. However, as per the provisions of the law, a registered person, being a bank or financial institution, has two options for claiming ITC:
- Claim ITC in proportion to taxable supplies, in accordance with Section 17(2) and Rules 42 and Rule 43 or
- Claim a flat 50% of the total eligible ITC on inputs, input services, and capital goods under Section 17(4) and forgo the remaining.
In the case of banks and financial institutions, the primary outputs include services such as interest on loans, bank locker facilities, and other similar financial products. Since interest income is exempt from GST, these entities are considered to be engaged in both taxable and exempt supplies.
As a result, they are required to apportion ITC based on the use of inputs for taxable and exempt services, as per Section 17(2) of the CGST Act. This principle equally applies to NBFCs that engage in both leasing and financial lending activities.Therefore, if an NBFC is also involved in the leasing of goods, which is a taxable supply under GST, the ITC attributable to the leasing business can be clearly identified and segregated In such cases, the NBFC may choose not to opt for the 50% ITC restriction under Section 17(4). Instead, it can claim full ITC on inputs used exclusively for leasing activities, by adopting the proportional ITC mechanism under Section 17(2).
Once a bank or a financial institution decides to opt for one of the above methods for claiming ITC, it will not be able to withdraw the option during the remaining part of the financial year. These options may be supplemented by two additional alternatives. First, Section 25(2) of the CGST Act allows an entity to obtain separate registrations for different business verticals, thereby treating them as “distinct persons” under GST. Second, the entity may choose to house the differentiated business activity within an entirely separate legal entity.
Therefore, in total, there are four strategic options available to NBFCs and banking companies to optimize their entitlement to input tax credit under GST:
| Option I | Option II | Option III | Option IV |
| Combined Approach | SILO Approach | Place of Business Approach | Entity Approach |
| Claim 50% of the eligible ITC on inputs, capital goods, and input services in a given month, and allow the remaining 50% to lapse, as per Section 17(4) of the CGST Act. | Claim ITC only to the extent attributable to taxable supplies, by applying the proportional allocation method in accordance with Section 17(2) and Rules 42 and 43 of the CGST Rules. | Register separate GSTINs for each place of business under the same legal entity, treating them as distinct persons under Section 25(2). This allows ITC to be managed individually for each business vertical. | Incorporate a separate legal entity to house a specific line of business. This allows full ITC eligibility on inputs used exclusively for taxable operations. |
Section 17(5) Blocked credits in specified cases:
There is a concept of blocked credit under GST, governed by Section 17(5) of the CGST Act, which specifies cases where ITC cannot be claimed, even if the goods or services are used in the course or furtherance of business. In the context of leasing transactions, we will examine the relevance of Section 17(5) specifically in relation to motor vehicles.
Section 17(5) which states as follow:
| 17(5) “Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely: (a) [motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:— (A) further supply of such motor vehicles; or (B) transportation of passengers; or (C) imparting training on driving such motor vehicles; XX” |
Hence, in terms of Section 17(5)(a)(A), if motor vehicles are acquired for further supply, they fall within the exception to the restriction on claiming ITC under Section 17(5). Accordingly, ITC shall be available.
Further reference can be made to Section 7, which defines supply as:
| “Scope of supply.- (1) For the purposes of this Act, the expression ―supply includes–– (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;” XX” |
Therefore if a motor vehicle is acquired for the purpose of making a further supply through leasing in the course of business, its acquisition does not fall within the scope of blocked credits under Section 17(5) of the CGST Act.
To effectively manage and distribute ITC across different units and branches, businesses may utilize the Input Service Distributor mechanism under GST, which enables centralized distribution of input service credits to multiple GST-registered locations of the same entity. The discussion below provides further insights into this mechanism.
Input Service Distributor
An Input Service Distributor (ISD) refers to an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, and issues a prescribed document such as an ISD invoice for the purpose of distributing the input tax credit of to one or more branches or units that are registered under the same PAN as the ISD.
This mechanism is particularly useful in businesses with centralized procurement of services but decentralized operations, allowing proper apportionment of credit to the units actually utilizing the services.It is important to note that the ISD mechanism is meant only for distributing the credit on common invoices pertaining to input services only and not goods used as inputs or capital goods.
Therefore we may summarize the above key Conditions for ISD:
- Separate registration required for ISD under GST- Section 24(viii) of CGST Act,
- Can distribute only credit on input services- Section 20 of CGST Act,
- Distribution must be proportionate to turnover of each unit during the relevant period,Rule 39 of CGST Rules
- Distribution is done via ISD invoice.
Applicability in Leasing Transactions
In the context of vehicle leasing, a company may operate through multiple leasing branches across various States, with a centralized HO responsible for procuring common input services such as insurance for leased vehicles,GPS tracking software,legal or consultancy services. These services are typically billed to the HO, resulting in the accumulation of input tax credit at the HO’s location, even though the benefit of such services is shared by various branches across the country (e.g., in Maharashtra, Karnataka, Gujarat). To ensure proper utilization of ITC and avoid blockage at the HO level, the company can register the Head Office as an ISD under GST. This enables the HO to distribute the ITC on such common input services to its branches in proportion to their actual usage or turnover.
This ISD mechanism facilitates efficient credit flow across operational units,compliance with GST provisions, and optimal utilization of eligible ITC throughout the organization.
Distribution formula
C1 = (t1 / T) × C
Where,
C = Total input tax credit to be distributed
t1 = Turnover of the recipient R1
T = Total turnover of all recipient
GST Rates
| Type of Leasing | GST Rate | Remarks |
| Leasing of new motor vehicle (non-electric) | 28% + Cess | Treated same as sale of vehicle |
| Leasing of electric vehicles | 5% | Only if used for further supply or passenger transport |
| Leasing of used vehicles (margin scheme) | 18% on margin | As per GST Council decision (w.e.f. 1 April 2025) |
| Operating lease (with transfer of right to use) | Same as goods rate | Taxed as supply of service, rate based on HSN of vehicle |
| Financial lease (no operator) | 18% or as per goods rate | Classified as transfer of right to use goods |
| Leasing with operator (transport service) | 5% / 12% | – 5% without ITC- 12% with full ITC option |
| For renting of motor vehicle with operator | 5% or 12% | Notification No. 11/2017 – CT (Rate) |
| Electric vehicles leasing | 5% | No cess; applies only when used for passenger transport |
| Solar panels, inverters, biogas units | 12% (same as sale of goods) |
Conclusion
GST law does not distinguish between operating leases and financial leases; both are treated as a supply of service for tax purposes. This consistent treatment simplifies the tax framework, irrespective of the lease’s legal or financial structure. Both types of leases are treated without distinction as a supply of service, regardless of their underlying accounting or legal classification. This approach ensures uniformity in taxation and facilitates easier compliance across various lease arrangements.
Furthermore, in the case of leasing, the GST rate applicable on the lease is the same as the rate applicable on the supply of those goods. This principle maintains parity between leasing and sale of goods to prevent tax arbitrage.
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