Execs Rush to Foreclose Car Leases Before GST

Lease rentals could rise by 25-30% in new tax regime

Corporate executives are rushing in their droves to foreclose existing car leases fearing a substantial increase in monthly payments once the goods and services tax (GST) is in place on July 1due to the absence of any transition mechanism.

Cab aggregators such as Uber and Ola that have about 30,000 leased cars also face this threat. Lease rentals could rise by 25-30% in the GST regime due to the rise in tax incidence.

The Centre is likely to raise the issue at the GST Council, the apex decision-making body, on June 30, when it meets before the midnight launch of the new tax, but no one is willing to take a chance.“We are looking at the issue and will take it to the GST Council,“ a senior government official said.

The transition rules provide relief to goods but leases seem to have fallen through the cracks.

An industry grouping that includes ALD, LeasePlan, Arval, TranzLease, Orix, Magma, AVIS, Clix Capital, Tata Capital, Ola, Uber, Sundaram Finance as well as the Tractor Manufacturers Association have petitioned the government seeking exemption from central goods and services tax on existing leases to prevent double taxation as central excise duty has already been paid on the vehicles. “We are flooded with requests to foreclose,“ said Hari Kaushik, president of TranzLease. “Our teams are working overtime to address this issue.“

Business dynamics for the industry are set to change completely with lease owners’ monthly payments rising.

The peculiar situation has arisen because such leases are treated as goods and not services and were accordingly being levied value added tax (VAT). The central excise tax had already been collected when these cars were purchased.

Under GST, which subsumes central excise and many state taxes, the levy will mean a kind of double taxation as excise has already been paid.

For example, if the basic monthly lease rent of a midsize car is ` . 25,000 under the current regime, it would face 12.5% VAT of . 3,125, taking the total to ` ` . 28,125. Under GST, however, the total will be ` . 35,750.That’s based on GST of 28% plus a 15% cess, making for an increase of 30%.

“At Ola Fleet Technologies, we run a leasing programme for tens of thousands of driver-partners who may not be able to afford buying a car of their own,“ said Shalabh Seth, CEO of Ola Fleet Technologies Ltd, a wholly owned subsidiary of Ola.

These driver-partners currently pay 14.5% VAT. In the proposed GST regime, they will have to bear GST rates of 29% to 43% on cars already leased, as an outcome of double taxation on existing leases.

“This will have an adverse impact on their livelihoods, setting them back by over ` .1 lakh for the remaining period of the lease, making it unviable to sustain their business,“ he said.

It’s not just cars that could be hit. More than 150,000 tractors are also impacted on account of incre account of incremental tax burden besides trucks, according to industry experts.

 

Date: 26th June 2017

Source: Economic Times

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