Tax on sale of repossessed assets under GST Regime – GST implications
Tax on sale of repossessed assets under GST: Financial transactions are at the very center of economic activity as investment in assets, goods and productive activity is funded by financial transactions. These transactions take various forms – from equity, to loans, to investment in various types of securities. Besides primary financing transactions, there are numerous secondary market transactions – including trades in securities, assignment and securitization of loans, etc.
The introduction of Goods and Services Tax (GST) is, admittedly, one of the most outstanding tax reforms since Independence, and therefore, it is very important to unravel the implications of GST on financial transactions. This article explain rules on GST implications for sale of repossessed assets…
Tax on Sale of Repossessed Assets under GST
In sales-tax and VAT regime, there has been inconclusive litigation on whether sale of repossessed goods by lenders is liable to be taxed in the hands of banks/financial institutions, who are not otherwise engaged in the business of buying/ selling goods. One of the early rulings in this regard is the ruling of Federal Bank Ltd vs State of Kerala (2007) 6 VST 736 (SC);  4 SCC 188. However, since the ruling depended on the text of the law in the State, there have been multiple cases on this issue. Calcutta High court ruling in Tata Motors Finance vs Asst Commissioner of Sales tax5 is presently pending before the Supreme Court. However, in the meantime, several courts have ruled in favour of taxability of sale of repossessed goods: Madras High court in HDFC Bank Ltd vs State of Tamil Nadu  60 NTN Dx 62 holding that lack of title with the seller does not affect tax liability in case of sale of repossessed goods;
Delhi High court in Citibank vs Commissioner of Sales tax – Delhi High court relying on the Calcutta and Madras rulings above. In addition, the Supreme court has ruled in Karnataka Pawn Brokers vs State of Karnataka that existence of title with the lender is not necessary for taxability for sales-tax/VAT purposes.
Under GST law, the ambit of taxability expands substantially, as we move from “sale” to “supply”. While one may await the answer from the Supreme court on taxability of repossessed goods as a “sale”, but the word “supply” used in GST law, in relation to goods, includes sale, transfer, barter, exchange, license, rental, lease or disposal, leaving little doubt that the disposition of repossessed goods by lenders will be liable to GST.
The real issue, in sale of repossessed goods, is the potential for cascading tax. Assume a bank repossesses a car for a defaulted loan. The car has an element of GST in its price (as the borrower bought the car with GST). On repossession, the bank does not get benefit of GST, and the price charged by the bank on sale will be subject to GST, thus leading to a duplication of GST.
This problem is sought to be resolved by proviso to Rule 32 (5) of the Central Goods and Services Tax Rule,2017 which says that in case of sale of repossessed goods from a defaulting borrower, who is not registered, the value of the output will be the difference between (a) actual sale price; or (b) depreciated purchase price, taking a depreciation of 5% per quarter or part thereof, from the date of purchase till disposal. The value of the output will be taken as nil, if (a) is less than (b).
The real problem arises in case of repossession of goods from registered dealers – admittedly, most of the defaulted loans in the country are accounted for by registered dealers, rather than unregistered ones, and post-GST implementation, in any case, there will be a strong demotivation for businesses to remain unregistered. Therefore, the relief given by proviso to Rule 32 (5) is only in case of retail lending, which is just a fraction of the mammoth NPA problem in the country. So, if the bank, or for that matter, an asset reconstruction company, uses its powers under the SARFAESI Act or similar law, and repossesses and sells movable property, is it to charge GST on the entire sale price, even though the price includes GST paid originally on the purchase?
What could have been the motivation of the law-maker in restricting the benefit of Rule 32 (5) only to repossessions from unregistered dealers? There may be two potential answers:
- Going forward, in case of credit facilities to registered suppliers, lenders may like to keep their loan-to-value (LTV) ratio limited to the pre-GST value of the asset, as the GST is something which the borrower avails as a credit from the government. In such a case, if repossession happens, the lender will credit only for the pre-GST value of the asset, and pay GST to the government.
- Alternatively, a legal issue that arises is – is repossession itself a case of “supply” by the borrower, and therefore, on repossession, a registered dealer should reverse his own input tax credit in favour of the lender? Note that the definition of “supply” includes several elements – including broadly-construed words such as “transfer” and “disposal”. The word “disposal” has been interpreted by the Supreme Court in Deputy Commissioner of Sales-tax vs. Thomas Stephen & Co . Ltd 1988 AIR 997 as follows: “Disposal means transfer of title in the goods to any other person. The expression “dispose” means to transfer or alienate. It was formerly an essential word in any conveyance of land. (See Jowitt “The Dictionary of English Law” and also Webster Comprehensive Dictionary (International Edn.)- Vol. 1, page 368). There is no transfer of title as between the borrower and lender, but there surely is a transfer of title by the lender to the buyer. In many cases, the lender may retain the asset himself, and use the same for hiring. Hence, whether the repossession is merely a pro-tem measure amounting to protection of the asset, or it amounts to transfer of proprietary interest to the lender, depends on the terms of the security document.
It would take quite some time of the law to get settled on repossessions from registered dealers; however, lenders are strongly advised to realign their lending policies to restrict lending to the pre-GST price of the asset.