Understanding the CCO’s Certification for DLAs: Digital Lending Directions, 2025

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Aditya Iyer | finserv@vinodkothari.com

The Reserve Bank of India (Digital Lending) Directions, 2025 (DL Directions), introduce the requirement for Regulated Entities (‘REs’) to report the Digital Lending Apps (DLAs) utilized by them on the CIMS Portal (Para 17). Moreover, there is now also a requirement for the Chief Compliance Officer or other designated officer to certify the compliance of these DLAs.

Simple as it may appear, this poses several questions such as: (i) Which entities exactly would need to be reported; (ii) Would entities with an indirect / lead-referral arrangement to the DLA also need to be reported; (iii) What about DLAs used in co-lending – which RE does the reporting?; and (iv) What compliances exactly need to be certified, since the regulations also require compliance of DLA with “extant regulatory instructions”.

In addition to the above, this also warrants discussion because the regulator has in recent news also been auditing the LSPs and is reportedly directly engaging with them. Therefore, the certification cannot be mere lip-service or a “tick-box” compliance, and must be founded on some substantive review  of the DLA. Hence, we attempt to answer the above questions in our present write-up, beginning of course, with the contextual background for these compliances.

Background

As of April 2025, there are a reported 24 Fintech “unicorns” in India, with a combined estimated valuation of $125 Billion[1], and as of December 2024, Fintech lenders reportedly serve around 23 million consumers (from 14 million in December 2022).[2] Hence, with drivers such as reduced geographical barriers, quick onboarding, expedited underwriting and disbursements, fintech lending seems to be booming.

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GST changes: Double dhamaka for car lessees; lessors to have elongated input tax recovery

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– Vinod Kothari & Jigisha Aggarwal | finserv@vinodkothari.com

GST changes announced vide 56th meeting of the GST Council dated Sept 03, 2025 have brought cheers to the entire country; however, for lessees of motor vehicles where rates of GST have been reduced (the extent of reduction being from 5% to 10% in most of the cases – reduction of rate from 28% to 18%, and the doing-away of the compensatory cess in others), the lessees of motor vehicles have unusual reasons to be cheered. At the same time, lessors who have existing leases of motor vehicles will have some present value losses. This article explains.

Futuristically, this reduction in GST rates on automobiles can benefit both lessor and lessees, as hopefully, the demand for motor vehicles will increase, and so will opportunities of leasing. However, there is a surprise bumper for the lessees who have currently on-the-run leases of vehicles – their rates of GST, going forward, will come down, even though the vehicle may have been acquired prior to the 22th September, 2025. Thus, while for the rest of the country, one has to buy a car to enjoy the rate reduction, lessees of existing motor vehicles also stand benefitted. Our article explains how.

On the other hand, for lessors, there will be a present value loss. With reduced GST rates, the initial outlay for the lessor, paid at the time of acquisition of the vehicles, will take longer to be recovered in the form of lease rentals – hence, the lessors will suffer a present value loss.

On an estimate, roughly Rs 6000 crores to Rs 8000 crores of car leases are done by lessors in the country; the outstanding volume of leases may be almost Rs 20000 crores. 

Post-22 Sept benefit for others; lessees of existing leases also stand benefited

For anyone else to take the benefit of the rate drop, you need to buy a vehicle on and from 22 Sept. 2025. However, for lessess of  existing lease transactions, the reduction in GST rates from 28% to 18% translates into a financial benefit and they clearly stand benefitted from the reduced GST rates. Lease rentals billed on/ after Sept 22nd, will attract lower GST rates which implies total periodic payment by the lessee reduces. 

Wondering why is it so? This is because while a lease is regarded as a “supply of service”, however, the rate of GST on leases of goods are aligned with the rate of tax on the sale of the respective goods. Hence, if the GST on cars is currently 28%, the rate of tax on lease of the car is also 28%, payable periodically as the rentals accrue. Thus, irrespective of the original purchase date of the vehicle, post 22nd September, the GST on existing leases will drop down, giving an unequalled bounty to the existing lessees.

Present value loss for lessors

When a lessor purchases a vehicle, he pays GST upfront at the time of purchase, on the entire purchase price of the vehicle. This GST paid becomes input tax credit for the lessor. On each periodic lease rental, he collects GST from the lessee. Lessor offsets this output GST collected from the lessor against the input tax credit. In case of lease transactions entered into before Sept 22, 2025, reduction in rates of GST would mean that lessor will need longer time to recover his input tax from the lessor. 

The reason being the vehicle was purchased at the higher GST rate (for instance 28%) and the lessor could avail ITC accordingly. However, Sept 22, 2025 onwards, the output GST collected periodically would reduce, for instance, would be collected at the reduced rate of 18%.

Therefore, the lessor will now take longer to fully recover the input tax credit by offsetting it against a lower input tax.

The same can be understood with the help of below mentioned illustration. Let us assume that the lessor had purchased a vehicle before Sept 22, 2025 and paid GST @28%.

ParticularsLease arrangement before Sept 22, 2025Lease arrangement on/ after Sept 22, 2025Impact
Cost of vehicle11,40,00011,40,000No change
GST= 1140000*28% = 319200= 1140000*18% = 205200Reduced by 1,14,000
Monthly lease rental30,00030,000No change
Monthly GST collected8,400 (28%)5,400 (18%)Reduced by 10%
Total GST collected in 12 months1,00,80064,800Reduced by 36,000
Total lease revenue (incl GST)4,60,8004,24,800Reduced by 36,000
Number of months taken to recover ITC319200/8400= 38 months205200/5400 = 38 months

In case of lease arrangement before Sept 22, the lessor was able to recover input tax of Rs 319200 in 38 months. Under the revised rates, the rate of GST on the existing leases will come down and will be Rs 5400 per month. Therefore, it will take almost 59 months to recover the ITC originally paid. Therefore, there will be a present value loss for existing leases, which would not have been priced by the lessors at the time of the original contract.

Changes under the automobile sector at a Glance

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 (which is now removed) 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. For a detailed understanding of GST implications on lease transactions, you may refer to our article here.

Since it has been decided to end the compensation cess levy, the compensation cess rate is being merged with the GST so as to maintain tax incidence.

As per FAQ No. 35 of the FAQs on the decisions of the 56th GST Council held in New Delhi issued by the Ministry of Finance, currently mid-size and big cars attract 28% GST and compensation cess ranging from 17-22% which makes the overall tax incidence ranging from 45-50%. Since the new GST rate on mid-size and big cars will be 40% with no compensation cess, the overall tax incidence has reduced by 5%-10%.

S. No.DescriptionEarlier rateNew rate
Rates reduced
1.
Petrol, LPG or CNG driven motor vehicles of engine capacity not exceeding 1200cc and of length not exceeding 4000 mm.28%18%
2.Diesel driven motor vehicles of engine capacity not exceeding 1500 cc and of length not exceeding 4000 mm.28%18%
3.Three wheeled vehicles28%18%
4.Fuel Cell Motor Vehicles including hydrogen vehicles based on fuel cell technology12%5%
5.Tractors (except road tractors for semi-trailers of engine capacity more than 1800 cc)12%5%
6.Road tractors for semi-trailers of engine capacity more than 1800 cc28%18%
7.Motor vehicles for the transport of ten or more persons, including the driver [other than buses for use in public transport, which exclusively run on Bio-fuels which is already at 18%]28%18%
8.Motor cycles of engine capacity upto 350 cc28%18%
9.Specified solar assets12%5%
Rates increased
10.Station wagons, racing cars, petrol, LPG and CNG cars of engine capacity exceeding 1200 cc or length exceeding 4000 mm28%40%
11.Diesel cars of either engine capacity exceeding 1200 cc or length exceeding 4000 mm28%40%
12.Motor vehicles with both spark-ignition internal combustion reciprocating piston engine and electric motor as motors for propulsion, of engine capacity exceeding 1200cc  or of length exceeding 4000 mm28%40%
13.Motor cycles of engine capacity exceeding 350 cc28%40%

Read More:

  1. Rentals on finance leases: To deduct it all or just the interest slice? 
  2. An Overview of GST Implications on Lease Transactions

Rentals on finance leases: To deduct it all or just the interest slice? 

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Tax accounting standard ICDS IX raises an unanswered question

– Chirag Agarwal | Assistant Manager (finserv@vinodkothari.com)

While leasing in India has developed much lesser as compared to other countries12, there is an interesting and growing line of business in India – CTC leasing, that is, lease of assets offered to employees of large companies with the rentals forming part of the employee’s CTC. The key to the tax neutrality of a CTC lease to the employer is the full deductibility of the lease rentals, as the rentals replace what would otherwise have been the employment benefit expense. But if the lease is intrinsically a financial lease, is it that the employer will still be able to expense the rentals, particularly after tax accounting standard ICDS IX, providing that the interest component of a financial lease will be treated as a cost of borrowing? CTC leasing practices in the past may have depended on some tax rulings, which pertain to the period before the applicability of the ICDS  – hence, the question is still an open one.

CTC leasing of passenger cars alone is nearly Rs 6000 crores annual volume business in India, constituting roughly 1% of passenger vehicles sold in the country.

In this article, we explore:

  • What is a financial lease? Is there a concept of financial lease, from the lessee perspective, now that accounting standards have eliminated the distinction from the lessee perspective?
  • Why is a financial lease equivalent to a borrowing transaction?
  • Why is the tax neutrality of a CTC lease to an employer important? 
  • Past rulings that may or may not hold the answer?
  • So, is ICDS IX decisive?
  • So, if ICDS IX does not apply, does ICDS I (substance over form) apply?

What is a Financial Lease and its accounting from the perspective of a lessee?

Finance Lease is an alternative to taking a loan. In this type of lease, all major risks and benefits of owning the asset are passed from the lessor to the lessee. The lessor only provides finance and keeps the legal ownership. At the end of the lease, the ownership of the equipment usually gets transferred to the lessee.

In Asea Brown Boveri vs IFCI, the Supreme Court quoted the following para from Vinod Kothari’s book Lease Financing and Hire Purchase, with approval specifying the features of a financial lease: 

“1. The asset is use-specific and is selected for the lessee specifically. Usually, the lessee is allowed to select it himself.

2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset.

3. Therefore, the lessee bears the risk of obsolescence.

4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore, the lease is non- cancellable by either party.

5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period.

6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation.

7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset.

8. The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest.”

As per AS 19, in a financial lease, the rent paid is divided into two parts, i.e., finance charges and capital recovery. 

With Ind AS 116, this changed. Under Ind AS 116, the lessee will need to show all leases as a “right of use asset” (ROU Asset) along with a liability to pay rent over time.

In this case, only the lessor needs to classify leases as financial or operating. For the lessee, there is no such difference and the asset will simply be recorded as a ROU asset. This position is supported by Para 61 of Ind AS 116 which states “A lessor shall classify each of its leases as either an operating lease or a finance lease.”. Further, Paras 22 to 60A, which deal specifically with lessee accounting, do not mention any requirement for classifying leases into finance or operating categories.

Why is a financial lease equivalent to a borrowing transaction?

A financial lease is considered similar to a borrowing transaction because, in substance, it functions like a loan. The lessor recovers the full cost of the asset along with a financing return through lease rentals, while the lessee gains the right to use the asset and repays the cost over time. The lessor’s primary risk relates to the lessee’s repayment capacity rather than the asset’s residual value, making it economically similar to a borrowing arrangement rather than a traditional lease.

Why is the tax neutrality of a CTC lease to an employer important? 

The entire CTC leasing model is based on the taxation benefit, where the employer claims the entire lease rental as a deduction while computing income under “Profits and Gains from Business or Profession.” This also benefits the employee since the taxable value under perquisites is comparatively lower than if the same amount were paid as direct salary. 

However, if we were to say that the employer, as the lessee, cannot claim full deduction for the lease rental, the employer would likely prefer paying the equivalent amount directly as salary. This is because salary expenses are fully deductible, making direct salary payments more tax-efficient in such a scenario for the employer.

There is yet another way the neutrality to the employer is impacted: the employer books an ROU assset and a related OTP liability; however, that may still be okay considering the employees’ interest. However, losing a tax benefit may be an added cost.

So, is ICDS IX decisive?

ICDS IX deals with borrowing costs, which defines the same as, 

are interest and other costs incurred by a person in connection with the borrowing of funds and include:

(iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements.

Hence, as per ICDS IX, the interest component of a financial lease will be treated as a cost of borrowing, and the deduction can be claimed only for the interest portion which is relevant only for the lessee.

However, as discussed above, under Ind AS 116, there is no difference between FL/OL for the lessee.  Accordingly, ICDS IX should not apply here. 

So, if ICDS IX does not apply, does ICDS I (substance over form) apply?

It may be noted that the ICAI Technical Guide on ICDS warrants that substance should prevail over the form (ICDS I). 

Hence, if we say that ICDS IX does not apply whether ICDS I should also not apply in case of financial lease? In our view, the substance of the lease would definitely matter. Even if the accounting distinction does not matter, if the transaction of lease is so structured so as to be equivalent to a loan, the deductibility of entire lease rentals would not be allowed. 

Hence, to get the benefit of deductibility, the lease shall be a true lease. The following may be considered as essential features of a true lease:

Past rulings that may or may not hold the answer?

The Supreme Court in its decision in the case of ICDS Limited Vs CIT (350 ITR 527) held that in a leasing transaction, the lessor would be entitled to claim depreciation under section 32 of the IT Act on the leased assets. On the other hand, the lessee would be entitled to claim the entire lease rentals as a deduction while computing its total income.

Similarly, in the case of Wipro Ge Healthcare Private Limited vs Assistant Commissioner Of Income Tax, 2023, it was held that the assessee is entitled to claim a deduction on account of lease rentals paid as it is a revenue expenditure on the ground that the assessee is only a lessee and the lessor is the owner of the assets leased.

A similar judgment was passed in the case of Tesco Bangalore Private Limited vs Deputy Commissioner Of Income Tax, on 23 May, 2022.

However, the case laws relate to the assessment year before the introduction of ICDS IX and hence the same cannot be relied upon now.

Thus, tax treatment of leases for lessees is still a grey area. While Ind AS 116 has made accounting simple by removing the difference between operating and finance leases, the taxability of leases still remains a question because of ICDS IX. 

Therefore, there is a need for a clear guideline by the IT dept that finally settles this question. 

Footnotes:

  1. We have discussed the evolution of leasing in India in this publication: https://www.ifc.org/content/dam/ifc/doc/mgrt/evolution-of-leasing-in-india-aug-30-2019.pdf ↩︎
  2. See India chapter in WLY 2023 volume: https://www.world-leasing-yearbook.com/wp-content/uploads/2023/12/India_WLY.pdf ↩︎

Budget, Bazaars and Bank Rate: Understanding inflation, GDP, Repo Rate etc.

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Access the Youtube video at https://www.youtube.com/watch?v=EXH6Nt1fXdg

Bugdet, Bazaars and Bank Rates – Simrat SinghDownload

See our other resources on this topic:

  1. https://vinodkothari.com/2025/02/union-budget-2025/
  2. https://vinodkothari.com/2022/08/hike-in-repo-rate-how-to-modify-loan-instalments/
  3. https://vinodkothari.com/2023/08/rbi-streamlines-floating-rate-reset-for-emi-based-personal-loans/

Virtual Session on Supply Chain Financing

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Register here: https://forms.gle/HHn6SqmfgHmgCJw2A
Workshop on Supply chain financing .pptx (1)Download

See our resources on the same:

  1. Unlocking Working Capital: An Overview of Supply Chain Finance
  2. Omnibus use vs know-its-use: Is Supply Chain Financing a revolving line of credit?
  3. From Trade Payables to Financial Liabilities: Ind AS Disclosure Reforms for Supply Chain Finance arrangements


Online money gaming: Financial Institutions to stay away

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– Saloni Khant | finserv@vinodkothari.com

The Promotion and Regulation of Online Gaming Bill, 2025, passed by the Parliament, received the assent of the President on Friday, 22nd August, 2025. The law will come into force on its publication in the Official Gazette. As soon as it becomes effective, the immediate implication of the Bill will be to prohibit online money gaming services.

Online money game is defined as “an online game, irrespective of whether such game is based on skill, chance, or both, played by a user by paying fees, depositing money or other stakes in expectation of winning which entails monetary and other enrichment in return of money or other stakes”. In other words, an online game, irrespective of whether it involves skill or chance or combination, where money (or other stake) is paid to play, with the expectation of winning (which may either be money or other enrichment), will be barred. 

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From Trade Payables to Financial Liabilities: Ind AS Disclosure Reforms for Supply Chain Finance arrangements

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Dayita Kanodia | finserv@vinodkothari.com

The amendments in Ind AS 7 emanate from similar amendments in IAS 7 by the IASB, made in May 2023, which itself is the culmination of a project that was initiated in 2020.

The amendments related to Supply Chain Financing (SCF) or reverse factoring arrangements. Globally, the SCF volumes increased by 8% to USD 2,462bn by the end of 2024.

Read our article explaining the Supply Chain Finance here.

The key features of a supply chain finance arrangement to require specific disclosure under the revised Standard are:

  • The trade payables of the entity are paid by a financial institution; the entity then pays to the financial institution.
  • The entity either gets extended payment terms, or the suppliers get earlier payment terms, than the terms as contained in the relevant supply invoices/agreements.
    • Examples: X Ltd acquires goods/services from vendors with a 90 days’ credit. It organises a supply chain financing arrangement where Bank A discounts the receivables and pays off the vendor within 30 days, whereas the Bank will collect payment from X on 90 days of the invoice. The arrangement is covered.
    • Same facts as above; but X is required to pay to the Bank in 180 days, whereas the Vendor is paid in 90 days. The arrangement is covered.
    • If the due date of payment to the Bank is the same as the due date of payment to the vendor, the arrangement has no economic value, and does not impact either party’s cashflows – hence, does not require any specific disclosures.
  • Note that the amendments do not affect asset side financing arrangements, that is to say, receivables financing or forward factoring.
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Supreme Court Mandates Digital Accessibility: Action Points for Banks and NBFCs

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– Harshita Malik | finserv@vinodkothari.com

Introduction

On April 30, 2025, the Supreme Court of India delivered a landmark judgment in Pragya Prasun & Ors. v. Union of India, declaring digital access as an intrinsic component of the fundamental right to life under Article 21. The Court issued comprehensive directions to make digital KYC processes accessible to persons with disabilities, particularly acid attack survivors and visually impaired individuals.

This judgment fundamentally transforms how banks and NBFCs must approach customer onboarding through digital means, with immediate compliance requirements and potential legal consequences for non-adherence.

Pursuant to the directives issued by the Supreme Court, the RBI has amended the Master Direction – Know Your Customer (KYC) Direction, 2016 (‘KYC Directions’) vide Reserve Bank of India (Know Your Customer (KYC)) (2nd Amendment) Directions, 2025 (‘KYC 2nd Amendment’).

Background: The Catalyst Case

The Petitioners’ Struggle

The petitioners in these cases highlight significant barriers faced by persons with disabilities in accessing digital KYC processes. WP(C) No. 289 of 2024 involved acid attack survivors who were unable to complete digital KYC, while WP(C) No. 49 of 2025 involves a visually impaired individual facing similar difficulties. A notable incident involved Pragya Prasun, who was denied the opening of a bank account  due to her inability to perform the blinking required for liveness verification. These cases are grounded in the protections afforded by the Rights of Persons with Disabilities Act, 2016, and the fundamental right to life and personal liberty under Article 21 of the Constitution.

Current KYC Barriers Identified

The Court recognized that existing digital KYC processes create obstacles for persons with disabilities:

Barrier TypeSpecific IssuesAffected Population
Liveness DetectionMandatory blinking, head movements, reading displayed codesAcid attack survivors, visually impaired
Screen CompatibilityLack of screen reader support, unlabeled form fieldsVisually impaired persons
Visual DependenciesSelfie capture, document alignment, front/back identificationPersons with visual impairments
Signature VerificationNon-acceptance of thumb impressions in digital platformsPersons unable to sign consistently

Legal Framework and Constitutional Mandate

Supreme Court’s Key Declarations

“Digital access is no longer merely a matter of policy discretion but has become a constitutional imperative to secure a life of dignity, autonomy and equal participation in public life.”

– Justice R. Mahadevan

The Supreme Court has firmly declared that digital access is no longer just a policy choice but a constitutional necessity to ensure individuals’ dignity, autonomy, and equal participation in society. This constitutional and legal mandate is grounded in several provisions: Article 21 guarantees the right to life with dignity, requiring digital services to be accessible to everyone; Section 3 of the Rights of Persons with Disabilities (RPwD) Act, 2016, ensures equality and prohibits discrimination against persons with disabilities; Section 40 mandates that all digital platforms adhere to established accessibility standards and Section 46 sets a two-year timeline within which service providers must achieve compliance with these accessibility requirements.

Supreme Court Directives: Banks & NBFCs Action Matrix

The Supreme Court issued twenty directives in the said judgement to ensure that services are not denied based on disability and digital services are accessible to all the citizens irrespective of the impairments. Most of these are for the regulators, while a few are for regulated entities.

Following is the list of actionables arising out of the directives for banks and NBFCs:

  1. Undergo mandatory periodic accessibility audits by certified professional[1], may involve PwD in user testing of apps/websites (SC directive ii);
  2. Procure or design devices or websites / applications / software in compliance of accessibility standards for ICT Products and Services as notified by Bureau of Indian Standards. This mandate applies to a broad spectrum of digital products and services, including :
    1. Websites and web applications;
    2. Mobile apps;
    3. KYC/e-KYC/video-KYC modules;
    4. Digital documents and electronic forms; and
    5. Hardware touchpoints (ATMs, self-service machines). (SC directive xi)
  3. Cannot reject PwD applications without proper human consideration, must record reasons for rejection. Banks and NBFCs may appoint a designated officer who shall be empowered to override automated rejections and approve applications on a case-by-case basis (SC directive xvi and KYC 2nd Amendment to Para 11 of the KYC Directions).
  4. In the process of customer due diligence, REs can accept Aadhaar Face Authentication as valid method for Authentication ( KYC 2nd Amendment to Para 16 of the KYC Directions).
  5. During the V-CIP process, REs cannot rely solely on eye-blinking for liveness verification. They must ensure liveness checks do not exclude persons with special needs. For this purpose, the officials of banks or NBFCs may ask varied questions to establish the liveness of the customer (KYC 2nd Amendment to Para 18(b)(i)).

Changes to the KYC Directions

Changes have been introduced in the KYC Directions via the KYC 2nd Amendment as a result of the SC verdict, these are captured in the diagram:

Closing Remarks

The Supreme Court’s judgment in the Pragya Prasun case elevates digital accessibility from a moral imperative to a constitutional mandate. Banks and NBFCs must view this not as a burden but as an opportunity to transform compliance into competitive advantage by becoming an accessibility leader.

[1] List of Empanelled Web Accessibility Auditors with Department of Empowerment of Persons with Disabilities, Ministry of Social Justice & Empowerment, Govt. of India.

Read More: Resources on KYC

RBI rationalises Guarantee regulations

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Introduces principle-based regulatory approach and reporting requirements

– Vinita Nair & Harshita Malik | corplaw@vinodkothari.com

The Draft – FEMA (Guarantees) Regulations, 2025 (‘Draft Regulations’) rolled out by RBI on August 14, 2025 for public feedback is set to replace the 25 year old FEMA (Guarantees) Regulations, 2000 (‘Existing Regulations’), with a shift from transaction-specific regulatory framework to a principle-based regulatory approach. The regulations apply to guarantee arrangements involving a surety (person who gives the guarantee), a principal debtor (a person in respect of whose default the guarantee is given) and a creditor (means a person to whom the guarantee is given) where the Person Resident In India (‘PRII’) provides/ avails guarantee to/ from a Person Resident Outside India (‘PROI’).

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