GST on Sale and Lease back transaction

Nowadays, the Business houses are entering into sale and lease back transaction of capital assets in order to meet the working capital requirement of the transaction.

The Sale and lease back transaction needs to be carefully analysed to determine the correct tax implications.

A humble attempt to list down the GST implication on sale and lease back transaction.

Sale of Capital Assets whether Supply in terms of GST ACT,2017 

The first leg of the transaction would involve sale of Assets by lessee to lessor.

In terms of section 7(1)(a) “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;” 

The taxability under GST arise on the event of supply accordingly the sale of capital assets for a consideration would fall under the ambit of supply and accordingly GST shall be levied.

Place of supply

In terms of Section 10(1)(c) of the IGST Act, the place of supply of goods where the supply does not involve movement of the said goods whether by the supplier or the recipient shall be the location of such goods at the time of delivery to the recipient. In the case of such sale, there is no physical movement of the asset from the premises of the lessee to the premises of the lessor. The ownership gets transferred in the premise of the lessee and accordingly the place of supply in this case will be same as the location of the supplier. Accordingly, the sale of the asset will be considered as an intra-state supply as per Section 8 of the IGST Act and will be subjected to CGST + SGST.

In case the lessor is not having the GST registration in the state from where asset is sold he would will not be eligible to avail ITC.

Invoicing

In terms of section 31(1) of the CGST ACT,2017 a registered person supplying taxable goods shall, before or at the time of

• removal of goods for supply to the recipient, where the supply involves movement of goods; or
• delivery of goods or making available thereof to the recipient, in any other case,

issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed.

Valuation

In terms of the section 18(6) of the CGST Act,2017 read with Rule 44 of the CGST Rules,2017, in case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount of GST higher of:

• input tax credit in the remaining useful life of the capital goods (computed on pro-rata basis), taking the useful life as five years.

For eg. Capital goods have been in use for 4 years, 6 month and 15 days. The remaining useful life would be 5 months ignoring a part of the month [5 year – (4 yrs. 6 months 15 days) ].  Further, let’s say input tax on such capital goods was availed as INR 100 at the time of procurement. Then ITC required to be discharged at the time of supply would computed as [Total ITC availed(100)/Useful Life(60)* remaining useful life(5)] or,

• on the transaction value of such capital goods or plant and machinery as per the commercial terms. Generally, the lessor procure the capital Assets at WDV as per the Income tax Act. In that case WDV as per Income tax act would be the transaction value.

E- way bill

In terms of Rule 138 of CGST Rules, 2017 every registered person who causes movement of goods of consignment value exceeding fifty thousand rupees in relation to a either supply or reason other than supply or due to inward supply from an unregistered person, shall, before commencement of such movement generate E way on the common portal. Further, in order to generate E waybill PART B is mandatorily needs to be filled wherein the details of transporter, vehicle number are required.

However, in the aforesaid case under study generally the movement of goods does not takes place and because there is no movement practically the Part B cannot be filed and accordingly E way bill cannot be generated. Hence, one may take the position not to issue E-way bill. In case department raises a query we need to justify and explain them that the transaction was in the nature of sale & lease back due to which practically there was no movement of goods. Hence, E Waybill could not be generated.