Even as car rental companies are hoping for some relief on existing leases, which will suffer from double taxation under the goods and services tax (GST), the government on Monday said online marketplaces would not be required to collect tax at source (TCS) from their customers for the time being. Moreover, it spared e-commerce vendors from registering on the GST Network till further communication. With the GST on leases is pegged at close to 43%, existing leases will become expensive since these will not be eligible for input tax credit unlike leases for vehicles purchased after July 1. As MS Mani, senior director, Deloitte, points out, the GST rate on lease rentals will be far higher compared to the existing VAT rates. “By equating the tax rates on leasing with those of the underlying asset, the government has effected an increase from an average of around 14% to almost 43% in case of most of the car leases,” he said.
Pratik Jain, leader of indirect tax at PwC, observed that although this issue will be resolved once these companies start using the vehicles manufactured after July 1 as input credit for GST paid will be available, the sharp jump in levies may result in cancellation of existing leases. “The industry could take a hit worth nearly Rs 1,800 crore,” Jain estimates. The June 30 meeting of the GST Council could take up the issue. According to GST provisions related to leasing of motor vehicles where the right to use is being transferred, existing leases will be taxed at the same rate as the vehicle, ranging between 29% and 43%, depending on the size of the vehicle.
Shalabh Seth, CEO, Ola Fleet Technologies, said that its driver-partners currently pay a 14.5% VAT but under GST, they will have to bear 29% to 43% tax on the cars already leased, as an outcome of double taxation. “This will have an adverse impact on their livelihoods,” Seth said.
Meanwhile, e-commerce companies, which are required to collect TDS (tax deducted at source) at the rate of 1% on payments to vendors, have won themselves a breather with the provision now having been kept in abeyance. Until further communication, vendors do not need to register on GSTN irrespective of their annual revenue.
“This step has been taken to provide more time for persons liable to deduct tax at source /e-commerce companies and their suppliers to prepare for the historic tax reform,” the government said in a statement. A spokesperson for the online vendors association pointed out the registration process for e-commerce players and other entities required to collect tax at source had begun only on June 25. “With four days to go for the GST roll-out, the government has decided to relax the norms for the time being to ensure better preparation,” he said However, he added that the mechanism for collecting tax at source should be implemented at the earliest to avoid tax evasion.
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“TCS will have an adverse impact on the earnings of the e-commerce industry, as working capital would will get blocked. It will create a disparity between e-tailers and brick-and-mortar shops,” said Utkarsh Birader, vice-president, products, Shopclues.com. According to industry estimates, approximately 1 lakh cars are currently leased across the country. According to Deloitte’s Mani, leasing as a business model, designed to equate cash flows over the period of the lease, is the preferred practice worldwide on account of the significant advantages it provides over the conventional asset acquisition model.