– Aditya Iyer, Manager (Legal) | finserv@vinodkothari.com

 I. Introduction to CTC Device Leasing

The economic device of purchasing an asset, and generating revenue by leasing it out is surely nothing new. However, through innovative leverage of accounting and tax norms, market participants devise offerings that continue to add novelty to this age-old practice. Today, there is an emerging business-opportunity with respect to leasing of electronic devices, which is gaining popularity due to associated tax benefits, short-tenures, and mass-market potential. In this article, we walk the reader through the quintessential features of this model, and the tax rules that make it possible.

Many are likely familiar with the CTC car-leasing model, which is considered a unique by-product of the Indian taxation system, and has been in vogue for several decades now. It entails a reduction in the employee’s taxable income due to the rules pertaining to valuation of perquisites [see Rule 3(2)(A) of the Income Tax Rules]. 

However, this arrangement is typically only made available to employees meeting a certain salary threshold, as it entails a significant financial contribution, and time commitment, on part of the employee (the time commitment is also of note here because it would require the employee to hold their position long enough to make pay-outs continuously for the tenure of lease).

As a result, the incentives and benefits associated with this CTC car leasing model do not percolate to employees who are not able to make said commitments/do not meet said thresholds.

Likely as a response to this market gap, there is now an emerging model of CTC leasing where the employer obtains a lease for electronics such as smartphones, laptops and tablets, and makes it available to the employees, while treating such lease payments as a part of the employee’s CTC. That is to say, the employer pays the lease rentals, but the same constitutes a part of the CTC – therefore, on a CTC basis, it is the employee who is actually paying the lease rentals. At the end of the lease tenure, the lessor may make the assets available to the employee for purchase at the residual value / other agreed value as specified in the contract.  The leasing of such assets to the employer, and the making available of such assets by the employers, to the employees, will be referred to as CTC Device Leasing.

Much of the value associated with CTC Device Leasing is linked once again to the reduction in taxable income for the employee, for, in the absence of the same, the employee may simply obtain those assets through any prevailing EMI schemes (consider also the fact that these EMI schemes may offer more competitive interest rates due to the absence of GST component). However, in that case, the employee earns the gross CTC, and pays tax on the same. To illustrate:

Assume an employee’s agreed CTC is Rs 100,000 a month, and the employer arranges for him a top-class laptop costing Rs 1 lakh, paying lease rentals of Rs 12000 a month for a year. Since this payment of Rs 12000 is a part of the CTC, the employer will now have to pay a salary of Rs 88,000 a month, which is taxed as his salary. However, for the employer, the CTC is Rs 1 lakh. At the end of the 12-month rental period, the employee gets to own the laptop from the lessor.

II. Unpacking the CTC Device Leasing Model

a.   Tax and GST Aspects

The reduction in the taxable income may be due to any one or more of the criteria mentioned under Rule 3(7) of the Income Tax Rules, and the legality of the same (i.e. whether that specific facility qualifies for the exemptions) would need to be evaluated on a case-to-case basis. However, generally speaking, reference in the case of mobile phone leasing (which is a common asset class being made available under this modell) is made to Rule 3(7)(ix) of the rules, read with Section 17 of the Income Tax Act, which would provide that

“Taxable value of perquisite shall be computed on the basis of cost to the employer (under an arm’s length transaction) less amount recovered from the employee. However, expenses on telephones including a mobile phone incurred by the employer on behalf of employee shall not be treated as taxable perquisite”^[1]

Here, it becomes necessary to examine the burden on the employer under the device leasing model. In the CTC car-leasing model for instance, the employer remains “cost-agnostic”. Because under that model regardless of whether the benefit is given to the employee by deducting ‘x’ amount from their CTC component beforehand, or by paying said ‘x’ component to the employee, the financial obligation viz. expense for the employer remains unchanged. However, because in CTC car-leasing the employer is not able to claim ITC on the GST paid to the Lessor with the Lease rentals (due to it being blocked credit  under Section 17(5) of the CGST Act), the cost is passed on to the employee, from whose salary along with lease rentals are also deducted the GST amount.

Under CTC Device Leasing, the employer is similarly cost-agnostic with the key difference being that employers are able to claim the ITC on the inputs (as it is not blocked credit). Hence, the employer would deduct only the actual lease rentals net-off from GST from the employee’s salary.

b.   Residual Value considerations

As has been mentioned above, at the end of the lease tenure, the lessor typically would make the asset available to the employee for purchase basis its residual value. An important consideration here is that unless the lessor is a financial sector entity, they would usually not wish to keep a very low residual value (10% or below) lest the lease be considered a “financial lease” as per accounting norms, and thus eventually require the lessor to obtain an NBFC registration (as the transaction would be considered substantively a financing transaction, with the assets being financial assets, and income from the assets posing concerns with respect to the PBC criteria). 

However, a higher residual value could also correspond to a decrease in the tax benefit for the employee, because the option to purchase the asset would be exercised post the lease tenure by the employee themselves, and such payout being made by the employee directly against the residual value, may not qualify for the exemptions under the Income Tax Rules.  Hence, there is a delicate balance the lessors would have to maintain, to ensure viability of the business-model, while also ensuring that the structure remains compliant with tax law.

c.    Trend-Cycling & Data Protection

One practical consideration here is that the tenure of the lease in  CTC leasing models gives the employer an added employee-retention benefit. However, in the case of device leasing, the lease tenures may need to account for the “trend-cycles”, whereby younger workforce (in particular) may have a preference towards upgrading the device as and when newer models are released (for e.g. new iPhone models are typically released within a year of the previous launch). If the lease tenure exceeds this time-span, the facility may lose some of its charm.

Another consideration here, would pertain to the deletion of the employee’s data from the device, having regards to applicable data protection law, in case the employee does not exercise the purchase

option / the possession of device is transferred to another employee (for e.g. due to employee’s exit from the company).

III.  Concluding Notes  – Impact on Leasing Volumes and Industry in India

Because this model is in its nascent stage, it may be too soon to predict what its impact would be on leasing volumes in India. However, as the data captured in our report, available here, may reveal – the growth of leasing volumes in India has been very low. The use of leasing appears to be kept afloat by models such as CTC car leasing, and now maybe through device leasing.

However, one can surely expect this model to be popular with the lessors who would be able to enter the leasing space without making significant capital expenditures / taking on large borrowings, and to some extent may even be able to lease by obtaining the assets through their own funds rather than borrowings, and use the churn (due to the short tenure) to keep the leasing going.

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^[1] See CBDT Resource on Income Tax Rules, available at: https://incometaxindia.gov.in/_layouts/15/dit/pages/viewer.aspx?grp=rule&cname=cmsid&cval=103120000000007059&searchfilter= .