Car Tax Regime change in India. Interview with Mike Curtis
Starting July 2017, the Indian Government has introduced a Goods and Services Tax. Surprisingly, this can be great news for fleet customers and the automotive industry alike, because before the introduction of the GST, tax regulations in India were, and this is an understatement, rather complex.
India’s indirect taxes used to consist of Service Tax and VAT. The first one was a country-wide taxation, so the same rate across the different states, whereas the second one was a State tax, that each of the 29 states could change at their own discretion. The administrative burden on both clients and suppliers was significant, as uncoordinated application and changes were frequent.
So… good news? Let’s ask Mike Curtis, CEO of Arval India.
Good news
Mike applauds the efforts of the Indian Government. “It’s a significant step forward, simplifying taxation and improving transparency. For passenger cars, the previous Central Excise Duty and VAT have been subsumed into GST at the new rate of 28%. In addition, an extra tax, called Cess was announced at varying rates, initially between 1% for small petrol cars to 15% for SUVs, although two months after implementation the government changed its mind and increased some of the Cess rates up to 22%. The overall the price of a new car including all the taxes and duties, doesn’t materially change from the previous tax regime, but there is an obvious advantage that the rates are now the same in every state.
When we ask Mike about the impact of the new taxation for vehicles supplied in the new environment, Mike reassures us: “There is good news for leasing in that GST and Cess payable on purchase are available for input credit which means that the investment value for a leased car reduces substantially. The same rate of GST and cess is payable on the lease rentals and on the sale of used cars”. In other words, the gross amount of the lease rental remains almost the same as before.
In addition, the new taxation is entirely digitised and GST returns are filed and reconciled monthly . Previously companies had to file VAT returns every month and sometimes wait years for reconciliation. In the new regime, the compliance burden is much greater but issues and disputes can be recognised and solved quickly.
This is an important step forward for India. GST is perceived as being progressive and sign of maturity of a country where administration, paperwork and a lack of tax harmonisation across the states has slowed down growth for years.
The transition to GST and where it went wrong
When asked about the transition measures and the applicability of the GST on existing leasing contracts, Mike takes a deep breath. “The transition is painful, for us and for the leasing customer as the government had not prepared well for transition. The Central Excise duty remains embedded in the leased car costs but the new rates of GST and Cess are chargeable at up to 50% compared to the 14%typically charged as VAT and the overall effect is that substantially more tax becomes payable. This double taxation applies to both lease rentals and sales of used cars, impacting both lessees and lessors alike. The additional tax burden for the customer is up to 30% more then before. . For the entire industry, the impact is almost 250 million dollars.”
In India, it is not unusual for companies to recharge the leasing cost to the employee’s salary, so this has an effect not only on the customer, but also on their employees, who are obviously not happy to see their salaries decreased because of a faulty tax regime.
But this is not all. Mike continues: “As already mentioned, in addition to the GST, there’s a second taxation, called CESS. This taxation was announced at between 1% and 15 and comes on top of the 28% GST, depending on the size of the vehicle. When the government announced its rate card in May, Arval and the other suppliers started information campaigns. Arval had briefed all its customers, meeting many of them personally to explain the changes. It was very difficult when the government changed the Cess rates on 11th September to explain again to customers who were already understandably irritated about the tax increase on the pre-existing fleets. Obviously, the new rates were higher than the old ones, although some remained unchanged.
Talking with the government
Arval and the other players on the market, have joined forces and started creating awareness by sending formal representations and meeting with government officials, including senior members of Prime Minister Modi’s government . Even fleet customers have shown their support to the leasing industry. “In most cases, customers understand that taxation is determined by government and appreciate that we are trying to address these very serious issues. However, entire while the government claims that while our concern is well understood, it is relatively small in the context of the Indian economy and we should not expect to be on top of the to-do list. We firmly believe that the double taxation of existing lease cars is extremely unfair and we will continue to push for an urgent resolution.”
Impact on the Indian leasing industry
Clients were aware for a long time that the taxation was about to change in favour of GST, as the impact of the new regulations applies across the entire economy. The confusion and frustration about the pricing increase and the tax increase in September has made it temporarily difficult for the leasing companies to convince clients of the simplicity and value of full service leasing.
“The leasing industry in India is very small, about 0.5% of new car registrations. The lessors share about 70.000 units amongst each other and we’re working hard to change the mind set of the business leaders in favour of leasing. The new tax regime’s lack of reasonable transition regulations could have a negative effect on the perception of our services and has slowed down the growth of the industry.”
The car and leasing industry: frustrated but confident
Mercedes’ CEO has spoken some hard words, threatening to reconsider the brand’s investment strategy in India.
Mike however remains positive about the future of Arval and the Indian leasing industry. “Arval has operated in the Indian market for 10 years and we understand very well that the growth of leasing in India will take more time. . Nevertheless, we will continue explaining to customers about the advantages of full service leasing and demonstrating that leasing versus buying is the way forward. We remain very optimistic about the future.”
Car Tax Regime change in India
Starting July 2017, the Indian Government has introduced a Goods and Services Tax. Surprisingly, this can be great news for fleet customers and the automotive industry alike, because before the introduction of the GST, tax regulations in India were, and this is an understatement, rather complex.
India’s indirect taxes used to consist of Service Tax and VAT. The first one was a country-wide taxation, so the same rate across the different states, whereas the second one was a State tax, that each of the 29 states could change at their own discretion. The administrative burden on both clients and suppliers was significant, as uncoordinated application and changes were frequent.
So… good news? Let’s ask Mike Curtis, CEO of Arval India.
Good news
Mike applauds the efforts of the Indian Government. “It’s a significant step forward, simplifying taxation and improving transparency. For passenger cars, the previous Central Excise Duty and VAT have been subsumed into GST at the new rate of 28%. In addition, an extra tax, called Cess was announced at varying rates, initially between 1% for small petrol cars to 15% for SUVs, although two months after implementation the government changed its mind and increased some of the Cess rates up to 22%. The overall the price of a new car including all the taxes and duties, doesn’t materially change from the previous tax regime, but there is an obvious advantage that the rates are now the same in every state.
When we ask Mike about the impact of the new taxation for vehicles supplied in the new environment, Mike reassures us: “There is good news for leasing in that GST and Cess payable on purchase are available for input credit which means that the investment value for a leased car reduces substantially. The same rate of GST and cess is payable on the lease rentals and on the sale of used cars”. In other words, the gross amount of the lease rental remains almost the same as before.
In addition, the new taxation is entirely digitised and GST returns are filed and reconciled monthly . Previously companies had to file VAT returns every month and sometimes wait years for reconciliation. In the new regime, the compliance burden is much greater but issues and disputes can be recognised and solved quickly.
This is an important step forward for India. GST is perceived as being progressive and sign of maturity of a country where administration, paperwork and a lack of tax harmonisation across the states has slowed down growth for years.
The transition to GST and where it went wrong
When asked about the transition measures and the applicability of the GST on existing leasing contracts, Mike takes a deep breath. “The transition is painful, for us and for the leasing customer as the government had not prepared well for transition. The Central Excise duty remains embedded in the leased car costs but the new rates of GST and Cess are chargeable at up to 50% compared to the 14%typically charged as VAT and the overall effect is that substantially more tax becomes payable. This double taxation applies to both lease rentals and sales of used cars, impacting both lessees and lessors alike. The additional tax burden for the customer is up to 30% more then before. . For the entire industry, the impact is almost 250 million dollars.”
In India, it is not unusual for companies to recharge the leasing cost to the employee’s salary, so this has an effect not only on the customer, but also on their employees, who are obviously not happy to see their salaries decreased because of a faulty tax regime.
But this is not all. Mike continues: “As already mentioned, in addition to the GST, there’s a second taxation, called CESS. This taxation was announced at between 1% and 15 and comes on top of the 28% GST, depending on the size of the vehicle. When the government announced its rate card in May, Arval and the other suppliers started information campaigns. Arval had briefed all its customers, meeting many of them personally to explain the changes. It was very difficult when the government changed the Cess rates on 11th September to explain again to customers who were already understandably irritated about the tax increase on the pre-existing fleets. Obviously, the new rates were higher than the old ones, although some remained unchanged.
Talking with the government
Arval and the other players on the market, have joined forces and started creating awareness by sending formal representations and meeting with government officials, including senior members of Prime Minister Modi’s government . Even fleet customers have shown their support to the leasing industry. “In most cases, customers understand that taxation is determined by government and appreciate that we are trying to address these very serious issues. However, entire while the government claims that while our concern is well understood, it is relatively small in the context of the Indian economy and we should not expect to be on top of the to-do list. We firmly believe that the double taxation of existing lease cars is extremely unfair and we will continue to push for an urgent resolution.”
Impact on the Indian leasing industry
Clients were aware for a long time that the taxation was about to change in favour of GST, as the impact of the new regulations applies across the entire economy. The confusion and frustration about the pricing increase and the tax increase in September has made it temporarily difficult for the leasing companies to convince clients of the simplicity and value of full service leasing.
“The leasing industry in India is very small, about 0.5% of new car registrations. The lessors share about 70.000 units amongst each other and we’re working hard to change the mind set of the business leaders in favour of leasing. The new tax regime’s lack of reasonable transition regulations could have a negative effect on the perception of our services and has slowed down the growth of the industry.”
The car and leasing industry: frustrated but confident
Mercedes’ CEO has spoken some hard words, threatening to reconsider the brand’s investment strategy in India.
Mike however remains positive about the future of Arval and the Indian leasing industry. “Arval has operated in the Indian market for 10 years and we understand very well that the growth of leasing in India will take more time. . Nevertheless, we will continue explaining to customers about the advantages of full service leasing and demonstrating that leasing versus buying is the way forward. We remain very optimistic about the future.”
