CS Nidhi Bothra

Lending is always to good borrowers but often the good borrowers become bad borrowers. Thus, the business of lending brings with it the trouble of enforcement of security interests as well. The repossession of the collateral asset and eventual sale for recovery of the losses due to default are a common phenomenon in lending business. This article deals with the GST implications for sale of repossessed assets.

Lender’s role in repo sales

Under the existing tax regime, there has been an inevitable question of whether sale of repossessed assets will attract sales tax? Whether the lender, selling the repossessed assets is doing so as an agent of the borrower[1]? There have been several rulings discussing these issues.

To be able address the questions one needs to understand a few things on sale of repossessed assets. There needs to sale before ownership of assets before there can be sale[2]. The lender is not the owner of the repossessed assets, the borrower is. Therefore the lender causing sale of repossessed assets is merely doing it with the objective of effectuating recovery of losses after default. The lender also does not do it as an agent to the borrower, since the lender is acting in its own capacity, by the powers vested under law and the contract entered into between the borrower and the lender. The lenders make sale of a repossessed asset on the strength of the hypothecation agreement, and not as a factor or agent. The matter was discussed in a Calcutta High Court ruling of Tata Motors Finance vs Asst Commissioner of Sales tax[3].

While there have been rulings qualifying the position of the lender, there have been other rulings stating that the title ownership of the assets does not determine the tax liability in case of sale of repossessed goods[4].

Most lenders eventually end up paying sales tax on sale of repossessed goods.

Repo sales of Moveable Property

Under GST law, taxability of repo sales seems beyond doubt. If one reads the provisions of rule 6 (5) of the Valuation Rules the position will come clear. The Rule states as follows:

(5) Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e. used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on purchase of such goods the value of supply shall be the difference between the selling price and purchase price and where the value of such supply is negative it shall be ignored: 

Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.

Provision specifically made in proviso to rule 6 (5) to provide a deemed input tax credit benefit by taxing only the difference between the actual sale price and depreciated value. The combined effect of the sub-rule (5) and its proviso is that in case of sale of repossessed goods, the tax is NOT on the full price, but full price minus the deemed purchase price. Deemed purchase price is the depreciated value, taking a 20% annual depreciation.

For instance, if you sell an excavator which is 3 years old, originally bought at Rs 10 lacs, is now repossessed and sold at a price of Rs 7 lacs, the GST treatment will be:

Selling price = Rs 7 lacs

Deemed purchase price as per proviso (10 – 3*20%) = 4 lacs

Taxable value = Rs 3 lacs

If the value is negative, it shall be ignored.

Some pertinent questions on the issue

Note that Rule 6 (5) is applicable only in case of repossession from a defaulting borrower, who is not registered. Does it mean, in case of registered dealer, there is a reversal of input tax credit in the hands of the borrower, and therefore, a proper GST claim in the hands of the lender?

The intent of the law in keeping the proviso limited to unregistered dealers could not have been to restrict the benefit. It will be a purely unintelligible discrimination to make a law that favors repo from unregistered dealers, but not favor one from registered dealer.

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Section 18 of the CGST Act states that –

(6) 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 equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher:

Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.

The section states that if capital goods on which ITC has been claimed are “supplied”, there will be a reversal of ITC based on higher of the contractual value and depreciated value.

Is repossession a case of supply?

Supply includes transfer as well as disposal. Involuntary transfers may not be sales, however certainly is a case of transfer even if there is no transfer of title.

In case of sale of repossessed assets, there is disposal of assets, whether from the borrower to the financier or from the financier to the purchaser is not relevant, what is, that there is a title transfer in the hands of the buyer. Whether title is conferred by way of a trail that travels from the borrower via the financier to the buyer or not, there is surely a transfer.

Therefore assuming a case that repo sales is a transfer. What is the contractual value of such sale?

Ideally the contractual value of such sales should be the credit financier gives in his post repo account statement.

The sale should be booked as a case of reversal of input tax credit. There is no reason for a borrower to continue to claim ITC for the capital goods which have been dispossessed from his.

Repo sales of Immoveable Property

Immoveable property itself is not covered by GST, however, the law says if the property is sold before completion certificate, it is covered by GST. Hence, if the lender has provided loan against property to a developer and enforcement happens before completion of the project, it is likely that there is a component of GST. In case of such sales, the value of land should be excluded from the computation.

Repo sales of Securities

Securities such as shares etc are exempt from the definition of goods and therefore are exempt from being a taxable supply. Hence in case pledge is invoked on securities, there seems no issue under GST laws.

Repo sales of Stock-in-trade

In case stock is repossessed and sold, the Rule discussed above shall apply. If the stock is repossessed and held, then it does not lead to supply and question of GST does not arise. If the stock repossessed is self-supplied, then there will be a question of tax being applicable.

Position of repo sales under GST

a. The position that emerges is as follows:In case of repo sale of moveable assets and stock, there will be GST applicable whether to a third party buyer or in case of self-supply.

b. In case of repo sale of immoveable assets, there is no question of GST being applicable however, if the repo happened prior to completion of the project (as in case of LAP loans), then GST will be applicable.

c. In case of repo sales of securities, there is no GST applicable as it is not a taxable supply.

d. In case repo assets is not sold/ supplied and held in stock, there is no GST applicable.

Conclusion

GST law poses certain questions which only the department can clarify or will unfold once put to test before the judiciary.


[1] In a Supreme Court ruling of Andhra Pradesh vs. Corporation Bank, (2007) 6 VST 755 (SC), it was held that bank is not a dealer in the assets. Subsequently an amendment was introduced in AP law including bank as a dealer.

[2] The matter was discussed in a Supreme Court ruling of Karnataka Pawn Brokers vs State of Karnataka. The ruling can be viewed here https://indiankanoon.org/doc/369962/

[3] https://indiankanoon.org/doc/40291817/

[4] HDFC Bank Ltd vs State of Tamil Nadu [2016] 60 NTN DX 62

[The above post is contributed by CS Nidhi Bothra at Vinod Kothari & Co. They  can be contacted at nidhi@vinodkothari.com respectively]

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