06 Jul 2017 13:04 IST

Buying a car is a better option than leasing one

Leasing, which has usually been a more expensive option, is now pricier

With financial leasing falling under the purview of GST and attracting rates applicable to assets that are being leased out, taking a car on lease just got pricier.

Lease rentals, in particular on large cars and SUVs that are taxed at 43 per cent under GST (28 per cent + 15 per cent cess), will be steeper than in the earlier structure.

The effective rate that a customer now pays on taking a car on lease could be 3-4 per cent higher than buying a car with an auto loan.

What’s changed?

Under the earlier regime, VAT of 14-15 per cent was charged on the lease rentals. In addition, in the case of a financial lease, service tax of 15 per cent was charged on 10 per cent of the interest component inherent in financial lease rentals. Under GST, since the tax will be charged based on the underlying asset that is being leased, tax incidence works out higher. In the case of luxury cars, for instance, lease rentals will be charged 43 per cent.

Existing lease transactions bore the brunt of this increased tax incidence and many leases were foreclosed before July 1 and converted into loans, or just settled for cash.

New lease transactions

In the case of new lease transactions, given the loss of time value in recovering the GST paid upfront on the car, the lessee (user/renter of the car) is likely to bear some additional cost, according to Vinod Kothari, a financial and legal consultant.

“A car buyer purchases the car paying 43 per cent tax on the basic price. A car lessee pays 43 per cent tax on the lease rentals — over the lease tenure. Admittedly, the present value of the lease rentals is the same as the basic price; hence, paying 43 per cent over time on lease rentals should amount to the same as paying 43 per cent on the basic price,” explains Kothari.

But while the leasing entity has the right to claim the 43 per cent as input tax credit (ITC), its ability to do so will depend on the output tax payable. The output tax on the rentals is only a portion of the cost of the asset. Thus, every new lease results in an accumulation of the carry forward of ITC.

“Thus, the lessor has to consider, while pricing the cost of the lease transaction, the loss of time value in recovering the GST paid upfront on the car. Assuming it takes 36-48 months for the lessor to fully recover the GST paid upfront, the cost to be passed on to the lessee may be as high as 2 per cent.

“That is, for an implicit interest rate of 12 per cent on the lease, the rate may have to go up to as much as 14 per cent,” adds Vinod Kothari.

Most banks offer car loans at 10-11 per cent currently. A ₹15-lakh car loan from a bank for, say, a tenure of three years at 10 per cent interest will result in an EMI of around ₹48,000. The same under a lease option at 14 per cent interest (see table) will work out to a monthly outgo of about ₹51,000 post GST.