GST Impact on Your Auto Loans

Easy availability of auto loans has pushed the growth of auto sales in India. It is definitely a major factor leading to exceptionally high sales figure over the past few years. But, introduction of GST will change the entire scenario of auto financing as well.

As one of the most significant economic reforms post-independence, auto-sector is expecting the overhaul of its business processes currently in practice across the country. The outdated tax regulations will be replaced with latest and business-friendly procedures.

Growth of Indian economy mostly depends on consumption story of the country. Automobile sector has made significant stride in past two decade due to availability of various options in vehicle financing. Both individual and corporate buyers find it easy to purchase a vehicle of their need and choice.

Impact of GST on Vehicle Finance:

In the pure financial terms, the lending companies earn revenues in the form of interest which is excluded from the levy of GST. It is the practice followed presently in India and internationally – keeping vehicle financing away from GST. But, they are still liable to pay GST on various charges which are recovered by financial companies from their customers from time to time during the tenure of a loan.

Consequently, the impact of GST will be felt by customers or borrowers who are getting their vehicles financed. As rate of GST on such charges are higher than present taxation, there will be an increase in the acquisition cost of a vehicle.

Important factors like rate of tax on a vehicle, availability of Input tax credit (ITC) of GST, and other related features will influence the borrower on the quantum of finance requirements. Buyer will factor in the GST rate and GST Compensation Cess before purchasing. This percentage changes from vehicle to vehicle.

The borrower would also be needed to consider the ITC in their hands on GST paid for a vehicle. This would also impact the buying decision. Purchaser would definitely consider the cost effectiveness including the finance cost before finalizing a vehicle. Hence, financing companies need to re-evaluate their loan products and need to redesign them by factoring the GST impact.

Leasing of Vehicles

This alternative method of financing a vehicle is also an important business tool for financing companies. The government has proposed the rate of GST on such transactions similar to the applicable rates of GST on a vehicle. Consequently, increase in GST rate as compared to current rates on lease transaction would substantially force finance companies to increase lease rentals.

There is a probability that financing companies would make a potential increase in their lease rentals due to the high GST rates on vehicles and utilization of ITC by financing company in proportion to lease rentals. This would impact the effective cost of financing companies and they may increase their IRR to compensate the same.

Vehicles repossessed by finance companies will also attract GST. This would impact the net realization of a vehicle for both, borrower and company.  Such double taxation would decrease the margin and financing company would be forced to think about the funding amount of factoring the concept of high GST on repossessed vehicles.

Verdict:

To conclude, it seems that income from interest earned by the finance companies will be exempted from GST but still it will have a significant impact on their business right from designing loan product to cost of financing.