GST Countdown: ‘Leasing Will Become An Emerging Opportunity’
NBFCs to face GST rate of 18%; how will it impact consumer transactions?
With the finalisation of most of the rules and rates for goods and services, the July 1 deadline for the implementation of the Goods And Service Tax (GST) seems inevitable. With 40 days remaining for the new indirect tax regime to kick in, BloombergQuint in its special series GST Countdown spoke with Ramesh Iyer, managing director of Mahindra & Mahindra Financial Services Ltd. who said that the new indirect tax regime will open up new opportunities for non-banking financial companies (NBFCs).
Here are edited excerpts from that conversation.
The new shift for financial services companies, like yours, is the registration you need to do in almost every state that you are present in. What has been your experience with the registration process?
So, we just started doing that. It wasn’t too difficult because there is preparedness on the other side for doing the registration. I guess the final date will come in as the final date of implementation comes in. If I were to put it on a scale of 1 to 10, I would say, very close to 8.
The GST rate for financial services has been pegged at 18 percent. How it will affect your business?
So currently it’s at 15 percent, which means if you go to 18 percent, there will be 20 percent increase in cost for consumers in business-to-consumers (B2C) transactions. So far as business-to-business is concerned, you will get a credit back, which means it’s only a timing issue, there will be no impact. But 15 percent becomes 18 percent, to that extent there will be an increase. I guess consumers will understand. GST will lead to ease of transactions compared to today. And therefore, this little increase should get accommodated.
Do you see any opportunities opening up for NBFCs i.e. are there any products that will become lucrative for NBFCs to offer under GST compared to the current regime?
If you look at other countries, leasing is one very prominent product from financial perspective. The customers want to acquire assets but may not want to retain them for too long. And they will look for a very residual value at the end of their contractual period, what can that be, and if that can offset the EMI they pay. For some reasons, leasing isn’t that prominent in our country because of inefficiency of tax, like lease tax etc. I think with GST coming in, all of that getting bundled into one, I think leasing could be one emerging opportunity.
And what are some of the products that you may want to look at in particular?
I would think large commercial vehicles could come into this segment, construction equipments can come into this, personal segment vehicles could come into this because these are assets which the consumers are willing to looking at. Resale prices are very a important aspect and with a good support from original equipment makers if a residual value can really be arrived at, I think these segments should show a lot of interest.
Let me also come to a big part of the GST ecosystem i.e. the technology that both the companies and the government will have to be prepared with. What does Mahindra Finance’s technology preparedness look like?
First is we operate in all states which means there will be a transaction happening in every state. So our systems need to ensure that we are able to file our returns at the state level. To that extent, the technology undergoes a quick change. Second is, today the technology features are to designed to handle the current transaction tax rate. With GST coming in, we have to change the way transactions are computed and the way returns get filed. So, like everyone else we are also engaging with consultants who can advise us, what is the right kind of technology that one needs to use.
But I think the good news is that these changes are not particular to any one company or possibly to even a one particular industry. Therefore, you will find there are many such service providers who are available, and therefore implementation of this will become much easier. Initially, it will come as a standard package but then as we start transacting through that, as we unearth some new requirements, amendments will take place.
Though most of the rules have been finalised by the GST Council, a lot remains unclear in terms of treatment of specific transactions for NBFCs. For instance, repossession of assets, assignment of receivables. What is your understanding about the treatment of these transactions under GST?
Currently we repossess the asset, we don’t capitalise them and it’s not owned by us. So, we are a pass-through way. So somebody delays repayment, surrenders the asset until it is sold to someone else, we put it in a trust and it is sold on behalf of the consumer to someone else at a price; the actual price has to be paid by the borrower. But there is a view by the tax department that there is a value-added tax applicable on this because it’s a sale.
As far as the possessed assets sale is considered, we would think there is a rate which will be applicable to these transactions. It will eventually, therefore, mean that the buyer of the second hand assets would pay that much more.
As far as assignment of receivables is concerned, it’s more of a financial arrangement; it’s not selling of assets; its assigning a portfolio to another party. This needs clarification.
Similarly the treatment of penal interest is also unclear. Penal interest is nothing but a part of overall portfolio interest rate. It’s just that someone delays to pay you an instalment; so instead of the three year contract if your given a four year contract, you would have anyway paid one year interest. So, on loans today, the interest is not taxable. I think it should be exempted under GST too.
Besides this, what are some of the other areas of concern, especially during the transition period?
As far as the transition period is concerned, I would think we will have to put some transactions to experience to say where we are getting stuck and what are the challenges. I think the bigger administration issue is filing of returns at every state level. We will have to build teams around each state. We have to have local employees who understand this better. So there will be a very clear increase in administrative costs, but over a period of time, there will be benefits.