CHENNAI: The introduction of the Goods and Services Tax (GST) is set to change vehicle financing, a major contributor to the growth of vehicle sales in the country.
The contention, by analysts, is that while the interest income of the financing companies will be GST exempt, other earnings through charges levied from the borrower will be liable. This is set to lead to an increase in net tax incidence after GST rollout.
“This is likely to increase vehicle acquisition costs which are set to be higher and customers will have to brace for that,” said an insurance agent who wished to remain unnamed.
Experts also point out that companies have to be careful on how they design their loan products, because the amount of financing needed depends on the GST rate of the vehicle in question.
Companies that try to adopt alternative methods of vehicle services, like lease agreements, will also have to contend with GST related consequences.
As per the announced system, the amount of GST to be levied on lease transactions will hinge of the tax applicability on the vehicle itself, which might lead to a higher cost. This in turn is likely to increase the cost of lease rentals, since the financing company will be utilising Input Tax Credit in proportion to the lease rentals.
“Äll this is quite likely to increase actual costs for buyers and lessees both. Even though interest income of finance companies have been exempted from GST, the other factors are likely to raise costs for customers under the new tax regime,” said a senior industry representative.
Sector players and analysts also say that sale of vehicles repossesed by the financing firm, in cases of default, are going to be less remunerative for firms because GST will be levied on those transactions too.