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GST on Lease Transactions

CA S K MISHRA 
on 02 February 2018

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A lease is a contractual arrangement between Owner (lessor) & user (lessee) whereby one party, the lessor, grants the right to use a particular assets (such as a parcel of land, building, equipment, or machinery etc) for a specific period and under specified conditions to the other party, the lessee.

Leases are broadly classified into two categories:

1. Finance Lease

Finance lease is relatively for a longer period which is sufficient to amortize the capital invested by the lessor (owner) & leave some profit. It involves the transfer of all risk & rewards associated with the ownership of assets to the lessee but the title may or may not be transferred at the end of lease period.

2. Operating Lease/Service lease/Maintenance lease

Operating lease is relatively for a short period of time. The lease period is shorter than economic life of the assets. Operating lease require the lessor to maintain & service the leased assets.

The taxable event in GST is 'supply' of goods or services or both. So a transaction to become taxable it must covers within the meaning & scope of 'supply'

As per Sec 7 of the CGST Act, 2017, the expression supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

As per Sec 2(83). 'outward supply' in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business.

From the above discussion, it is cleared that the term 'lease' is covered within the meaning & scope of 'supply' and it is a taxable supply.

The term lease has not been defined anywhere in GST Act or Rules. To classify a lease transaction as either supply of goods or supply of service, we have to refer Schedule II of the CGST Act, 2017 where in clear guidelines for classification of a transaction as either 'supply of goods' or 'supply of services' has been enumerated, based on certain parameters :-

  • Any transfer of the title in goods is a supply of goods;
  • Any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;
  • Any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.
  • Any lease, tenancy, easement, licence to occupy land is a supply of services;
  • Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

From the above it can be infer that GST does not differentiate between Finance & Operating Leases. What is important is whether 'transfer of title' involves in the lease transactions or not.

  • If the lease agreement stipulates transfer of title : Supply of goods
  • If the lease agreement does not stipulates transfer of title : Supply of services

Note : A mere option to buy the assets at the end of lease period will not cover within the meaning of 'Transfer of Title'.

GST Rates on Lease transactions

  • Lease of industrial plots, provided by the State Government Industrial Development Corporations or Undertakings to industrial units- Nil Rate
  • Leasing of Agro Machinery/ Vacant land - Nil Rate
  • GST on Lease transactions which will be covered under the category of 'Supply of Services' shall be chargeable at same rate as on supply of similar goods.

Sl No.

Description of Service

Rate

01

Transfer of the right to use any goods for any purpose (whether or not for a specified period)

Same rate of GST and compensation cess as on supply of similar goods

02

Any transfer of right in goods or of undivided share in goods without the transfer of title thereof

Same rate of GST and compensation cess as on supply of similar goods


Notification No. 37/2017-Central Tax (Rate) Dated 13th October 2017

In respect of Vehicles purchased and leased prior to July 1, 2017, GST rate on such transaction shall be 65% of the GST rate (including compensation cess) applicable on similar kind of vehicle. These rates would apply for a period of three years with effect from 1st July 2017, i.e up to 30th June 2020.

Leasing of aircrafts under Schedule II [5 (f)] by a scheduled airlines for scheduled operations- 5%

Note: For conceptual clarity & latest provisions of GST laws, the readers may refer 'Systematic Approach to GST' & 'Indirect Tax Laws' (GST +Customs Law) By S K Mishra, FCA at following links.

The Author is a Fellow member of The Institute of Chartered Accountants of India , New Delhi & Fellow member of The Institute of Cost Accountants of India, Kolkata and can be reached at gstresolve@gmail.com.


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