The GST council has lowered the tax rates on vehicles purchased and leased to a record 65 percent of the applicable GST rates even including compensation cess. Overall the calculation has shown that the rates of GST will now be reduced from 43 percent to a substantial 28 percent now. This decision comes out to be a big relief for such companies who purchase vehicles and leases them out. All the decisions in which the relief provided to the existing or old vehicles leases of motor vehicles were taken in the recent 22nd GST council held on 6 October.
The major decisions taken were, Leasing of vehicles purchased and leased prior to July 1, 2017 would attract GST at a rate equal to 65 percent of the applicable GST rate (including compensation cess); Such vehicles when sold shall attract GST of 65 percent of the applicable GST rate (including compensation cess); Sale of vehicles by a registered person who had procured the vehicle prior to July 1 and has not availed any input tax credits of central excise duty, VAT or any other taxes paid on such motor vehicles, would also be subject to 65 percent of applicable GST rate (including compensation cess).
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In the release of statement and decisions, it was mentioned that these rates would be applicable for a term of three years starting July 1. MS Mani, Partner-GST, Deloitte India, stated that “while the reduced effective rate of 65 percent (of the applicable GST + compensation cess rate) is welcome, it still falls short of the industry’s expectations as this is significantly higher than the erstwhile rates.”
Clear Anomaly in the tax structure of existing car leases:
Here is an example: I got a car(Mid-segment = 45% – GST+CESS) costing 11.12L on lease in April with a lease rental of 24K (including 14.5% VAT), but after July 1st, 2017 the company started charging me 30,500/- which is 30.5% more tax.
If the same Car is leased after July 1st, the Lease rental even with 45% GST+CESS would be around 25K (very close to my original EMI), just because of the concept called GST input Credit.
When a car is purchased, the ex-showroom price is arrived by adding all the taxes Octroi etc. to the Base value of the Car. when the car is going to be leased, the taxes within the ex-showroom price are credited to the Leasing Company as Input Credit as these companies would charge the same %age of tax on lease rentals.
For example, Post-July 1st 2017 If the base value of a mid-segment car is 6L, the ex-showroom price would be 8.7L, on top of which all others like RTO, insurance etc is charged.
When the same car is leased, the leasing company would get a credit of 2.7L upfront and it would charge 45% on the Base lease rental value, such that the Lessee is taxed only once.
So, the problem is that the lease contracts prior to July 1st would be the losers with lease rental and RV increased by around 13.5 to 35% increase. Not the new contracts signed after July 1st.
Govt notification of 65% abatement for 3 years for Car leases prior to 1st July 2017 is not correct, as still there is a huge difference between the cost between the new leases availed after 1st July 2017 and Leases prior to July 1st, 2017.
Also, lease periods would last for 3-5 years – what would happen for 4 and 5-year leases.