What happens to auto loans from July 1

By MS Mani and Sandeep Gupta

Affordable and accessible car loans have been a major contributor to vehicle sales growth in the country, but with the introduction of the GST from July 1, vehicle financing will see a change.

With the introduction of the GST, one of the most significant economic reforms to have taken place in India after independence, it is expected to overhaul the business processes currently being adopted in India due to the age-old tax regulations imposed by Central Governments and states.

With the liberalization of the economy, India has experienced significant growth in terms of activity and consumption over the past two decades.

During this period, the automotive sector has also made significant progress. A significant reason fueling the growth of the said sector has been the availability of various financing options for individuals and businesses to purchase a vehicle of their choice and needs.

GST on car financing

In pure finance transactions, the finance company primarily earns interest on the financing of vehicles which would be exempt from the GST levy. The same is in line with international practices as well as the current practice adopted in India. However, the finance company would still be liable for GST on various charges collected by it from the borrower during the term of the loan agreement.

Thus, the borrower would still be affected by the GST on his vehicle financing arrangements. Since the GST rate on these charges is higher than the current rate, the borrower must be prepared for an increase in the cost of acquiring his vehicle.

The amount of financing required by a borrower is potentially influenced by indirect tax aspects such as vehicle tax rate, availability of ITC of GST paid on vehicle purchase, etc. This would be impacted due to the high rate of GST coupled with the GST Cess offset on all vehicles at varying percentages.

The availability of the GST ITC paid on vehicles in the hands of the borrower could also impact the borrower’s decision-making considering the actual cost of the vehicle (including the cost of financing). Therefore, it would be imperative for the finance company to consider the impact of GST on the borrower when designing their loan products.

The finance company may have to deal with other financing alternatives such as vehicle leasing. It is proposed that the GST rate on these transactions be tied to the applicable GST rate on the vehicle. The impending increase in the GST rate for rental transactions compared to the current regime could lead to a substantial increase in rental rents by the finance company.

In addition, the high rate of GST on vehicles, combined with the fact that the finance company would use the ITC in proportion to the rents, could impact the effective cost of financing for these companies, resulting in a potential increase in rents for the tenants. . Additionally, the ITC restrictions placed on a finance company impact its effective cost, which ultimately necessitates a higher IRR when planning its leasing products.

On the other hand, the levy of GST on the sale of vehicles repossessed by a finance company is also expected to impact the net realization for both the company and the borrower due to the high rate of GST on vehicles, resulting in lower margins and double taxation.

Conclusion

Thus, it is apparent from the above that although there is an apparent exemption for interest income earned by vehicle finance companies, the GST could still have an impact on the finance business from the perspective of product design, financing cost and their margins.

MS Mani is Principal and Sandeep Gupta is Principal at Deloitte Haskins and Sells LLP