The Tamil Nadu Authority for Advance Ruling (AAR) has ruled that the interest subvention income received by Daimler Financial Services India Private Limited (DFSI) from Mercedes-Benz India Private Limited, to reduce the effective interest rate to the final customer, attracts a GST of 18% (9% CGST and 9% SGST).
Daimler Financial Services had moved the AAR seeking a clarification on whether interest income from the motor vehicle manufacturer for retail financing to purchasers of motor vehicles is liable for GST (Goods and Services Tax).
“Customers who purchase Mercedes-Benz cars from the authorised dealers may require financing. Daimler Financial acts as a financier and provides loan to customers at interest rates lower than alternative providers,” it said.
The differential interest (market rate less the rate offered to customers) is paid to Daimler Financial by Mercedes-Benz. For instance, Mercedes-Benz car buyer would normally be liable to pay interest a 10%. Under the subvention agreement, the customer is liable only for 8% and the balance 2% is paid by Mercedes-Benz.The AAR said that the agreement between DFSI and Mercedes-Benz India is for the furtherance of the business of lending of the former, as they are the preferred financiers for the cars.
The customers would prefer to take out a loan from DFSI because of the lower interest rates offered as a consequence of their agreement with Mercedes-Benz and therefore, the transaction is a supply under Section 7 of CGST Act, it said.
‘Not setting precedent’
“An advance ruling is binding only on the applicant and the revenue in so far as that applicant is concerned. It is not in the nature of a judicial precedent and need not affect other assessees . In so far as the issue is concerned, it is difficult to visualise a taxable supply where there is a subvention of interest,” said K. Vaitheeswaran, advocate and tax consultant.
Abhishek Jain, tax partner, EY, said “This has been an issue especially for the automotive and consumer goods industry from the service tax era, with inheritance under GST as well. Many industry players have viewed this as interest only and claimed an exemption from tax. Given the ambiguity and related repercussions, the government should consider issuing an explicit clarification on the same.”
