GST Applicability on Financial, Operating, Dry and Wet Lease

A financial lease, under the CGST Act, 2017, is treated as a supply of goods, with GST charged on the entire value at the lease’s inception. The lessee assumes ownership-like risks and rewards, and Input Tax Credit (ITC) can be claimed if the leased goods are used for business purposes, barring restrictions under Section 17(5). In contrast, an operating lease is classified as a supply of services, with GST charged periodically on lease rentals. The lessor retains ownership, and the time of supply follows the invoicing or payment schedule. Dry leases involve only the asset, with the lessee managing all operational aspects, while wet leases include operational services such as crew and maintenance. Both dry and wet leases are treated as supplies of services, but wet leases are considered composite supplies, where the principal service determines the GST rate. ITC can be claimed in both cases if the asset or service bundle is used for taxable supplies and not restricted by law. The key difference lies in operational responsibility: dry leas

1. Financial Lease

• A financial lease, often considered akin to a sale, transfers substantially all the risks and rewards associated with ownership to the lessee.
• Supply Classification: As per Schedule II, Clause 1(c) of the CGST Act, 2017, a financial lease is treated as a supply of goods when it involves the transfer of the right to use goods for an agreed period. The lease is classified as a supply of goods, and the GST is payable on the entire consideration.
• Time of Supply: GST liability arises at the time of supply, which in the case of a financial lease is the earlier of the date of invoice issuance or the date of receipt of payment. The entire value of the lease is taxed upfront.
• GST Applicability: In a financial lease, GST is charged on the entire value of the lease at the inception of the lease term. The lease is treated as a supply of goods, and the tax liability arises as per the rate applicable to the goods being leased.
• Input Tax Credit (ITC): The lessee may claim ITC on the GST paid, provided the leased goods are used for business purposes and not specifically blocked under Section 17(5) of the CGST Act, 2017.

2. Operating Lease

• An operating lease does not transfer the risks and rewards of ownership to the lessee. The lessor retains ownership and merely provides the right to use the asset. It’s more likely a rental arrangement with the lessee.
• GST Applicability: In an operating lease, GST is charged on the periodic lease rentals as the supply is considered continuous. The rate applicable depends on the nature of the asset being leased.
• Supply Classification: As per Schedule II, Clause 5(f) of the CGST Act, 2017, renting or leasing of immovable property or goods without the transfer of title is treated as a supply of services.
• Time of Supply: GST is payable on a continuous or periodic basis. The time of supply for an operating lease is determined as the earlier of the date of issuance of the invoice or the date of receipt of payment. Since it is a continuous supply, invoices are typically issued periodically, such as monthly or quarterly.
• Input Tax Credit (ITC): The lessee can claim ITC on the GST paid on the lease rentals if the leased goods are used for taxable supplies.

3. Dry Lease and Wet Lease concept

Dry Lease

A “Dry Lease” involves leasing only the asset without any accompanying crew, maintenance, or insurance services. The lessee is responsible for the operation and maintenance of the leased asset.

Wet Lease

A “Wet Lease” involves leasing an asset, typically an aircraft or a vessel, along with the crew, maintenance, insurance, and other services provided by the lessor. The lessee essentially rents the asset fully operational.

Both leases are type of Operational lease.

4. Comparison of Dry Lease and Wet Lease in terms of GST Law